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 partner’s 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 won’t 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)

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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 partner’s 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 partner’s 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 deceased’s shareholding

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

they refuse to sell?

Lack of liquid capital

Even if the deceased’s 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.

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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 partner’s 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 deceased’s 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 deceased’s 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 partner’s successors retain shareholding and come into the business.

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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 partner’s 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

deceased’s 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

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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.