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Partnership Insurance for Solicitors

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  • Partnership Insurance

    KEEPING YOU ON COURSE

    Solicitors

  • You can remain incontrol even when the unexpectedstrikes.

  • IntroductionOn death the shares of a deceased solicitor form part of their estate. Those who inherit the shares may

    not want to get involved in the business or the surviving partners may not want the next of kin to come

    into the business. Most feasible option is to sell share of business back to the surviving partners. This

    would require the partners to produce a substantial lump sum. The solution is Partnership Insurance -

    an arrangement can be put in place whereby on the death of a partner, funds become available to buy

    share of business back from the next of kin.

    The partners of a practise may be legally bound, either under their own Partnership Agreement, or

    under the Partnership Act 1890, to pay an immediate capital sum to the deceased partners estate in

    respect of:n the deceased partners share of undrawn profits for the year in which he / she died.n the deceased partners share of any partnership fixed assets, such as the office-building.n the balance of his / her capital or loan account.n a payment in respect of the deceased partners share of partnership goodwill.

    It wont happen to our PractiseThe odds of one partner dying or becoming seriously ill before retirement are probably higher than you

    think.

    Age Sole 2 Partners 3 Partners

    35 13% 23% 32%

    40 12% 22% 32%

    45 12% 21% 30%

    50 11% 19% 28%

    (Odds of one dying before age 65)Source: mortality tables (AM92) published by the Institute of Actuaries (UK)

    1

  • Ask yourselfHow would your partnership survive if one of the

    partners became seriously ill or died?

    If your partner died what would happen to their

    share of the partnership?

    How would you feel about a partners family

    joining your business if he/she died suddenly?

    If you died what would happen to your share of the

    partnership?

    Are your spouse or children in a position to take

    your place in the partnership?

    How will your family survive financially?

  • Implications if partnership insurance is not put in placeSurviving Partners

    Next of Kin retain Shareholding

    The deceased partners spouse and children may

    decide to retain shareholding and come into the

    business.

    There could be disagreements about how the

    business should be run, particularly if the next of

    kin had no experience of the business.

    Refusal to sell

    The ideal outcome for the surviving partners

    may be to buy back the deceaseds shareholding

    from his/her next of kin. But what happens if

    they refuse to sell?

    Lack of liquid capital

    Even if the deceaseds next of kin are willing to

    sell, the surviving partners simply may not have

    sufficient liquid capital to buy the shares from

    them.

    The surviving partners could borrow the

    necessary funds but they would then be faced

    with the burden of loan repayments for years to

    come.

    Next of Kin

    An illiquid asset

    If share in business is not sold, the next of kin

    may be left holding a paper asset producing

    little or no income. The position could be

    even more serious if the shares also give rise

    to an immediate inheritance tax liability for

    dependants.

    No ready market for shares

    The problem is compounded by the fact that

    the next of kin may not be permitted to sell

    their partnership share to any other third party.

    They must therefore wait for payment from the

    surviving partners.

    3

  • We have a solution to suit

    your type of business

  • How it worksEach partner effects a life insurance policy on his/her own life, for a sum insured equivalent to the

    estimated full market value of his/her partnership share. The premiums are generally paid by the

    partners themselves or by the partnership from that partners share of the profits. The premiums are

    not tax deductible.

    Each policy is arranged under trust (using the Partnership Insurance Trust Form) so that on death, the

    proceeds are payable directly to the trustees for the benefit of the surviving partners.

    A legal agreement is put in place between the partners using a Partnership Double Option Agreement.

    In the event of death, the proceeds of the life assurance policy are payable to the surviving partners to

    be used to buy back shares from the deceaseds next of kin.

    Legal AgreementDouble Option Agreement - is a legal agreement put in place between the partners, giving the

    surviving partners an option to buy shares back from the deceaseds partners next of kin and the next

    of kin an option to sell the shares to the remaining partners. If both parties mutually agree not to

    exercise the option, the deceased partners successors retain shareholding and come into the business.

    5

  • Navigation Wealth can help keep your business on course

  • Tax Position*Next of Kin

    A shareholding in a partnership passing to a

    legal spouse is exempt from Capital Acquisitions

    Tax (CAT/Inheritance Tax) but shares passing to

    any other individual will be subject to normal

    CAT rules.

    The proceeds from the disposal of the share in

    the partnership would be liable to Capital Gains

    Tax in the hands of the deceased partners next

    of kin.

    Capital Gains Tax would only arise for the next of

    kin in respect of any increase in the value of the

    share of the business from the date of death to

    the date of disposal. It is unlikely there would be

    any such increase in share value in a partnership,

    which has just suffered the death of a partner.

    Surviving Partners

    On death the proceeds of the policy are paid to

    the trustee(s) of the policy for the benefit of the

    surviving partners.

    The Revenue Commissioners have clarified that

    the proceeds of such a policy are exempt from

    Inheritance Tax in the hands of the surviving

    partners, in certain circumstances, to the extent

    that they use the proceeds to purchase the

    deceaseds share of the business.

    The proceeds of partnership insurance payable

    on death or disablement are not liable to Capital

    Gains Tax under current legislation.

    * Own Life in Trust Arrangement

    7

  • KEEPING YOU ON COURSE

    Navigation WealthUnit 1F/1G,

    North Valley Business Centre,

    Old Mallow Road, Cork.

    T: 021 490 9104

    info@navwealth.ie

    www.navwealth.ie

    Navigation Wealth Ltd trading as Navigation Wealth is regulated by the Central Bank of Ireland.

    Company No. 394662. Registered Office: Unit 1F/1G, North Valley Business Centre, Old Mallow Road, Cork.