Friday, October 22, 2010

Company owned business succession insurance

Last week, we revisited with an adviser a strategy that had been put in some years prior by a trading company.

The trading company had obtained insurance policies for death and permanent disablement over each of the core principals who also controlled the ownership of the shares in the company.

The discussion centred on the tax consequences of a receipt by the company of the insurance proceeds and practically how the transfer of shares to the surviving principals would take place.

While from a simplicity (and Division 7A) perspective, company ownership of business succession insurance can be attractive, the disadvantages do normally outweigh the benefits.

Last week’s situation was no different given that on receipt of the insurance pay out by the company, steps would still need to be taken to:

1. Have the funds transferred to the exiting shareholder or their estate.

2. Ensure that the exiting shareholder transferred their shares.

As it turns out, primarily due to the significant increase in premiums that would be incurred to rearrange the current ownership structure, the adviser here is looking at other solutions to ensure that the existing structure can work as well as possible. It was however a timely reminder that business succession arrangements do require regular review.

Until next week.