In addition to the personal tragedy for all concerned, the death of a partner in a business causes major problems for the surviving partners, and the deceased’s next of kin.
The Surviving Partners
The other partners face the prospect of having to find a substantial capital lump sum on the death of a fellow partner. If advance provision is not made, the surviving partners may be faced with the need to borrow capital to fund the repayment to the deceased partner’s estate.
In many such cases, the deceased partner’s share of the partnership will represent the single largest financial asset he owns, and hence his next of kin will expect a substantial immediate payment from the continuing partners.
The onset of a sudden serious illness of a partnercould give rise to a situation similar to that arising on death:
• The ill partner may want to sell his share of the partnership and realise a lump sum in order that he may retire from the business.
• The other partners may not have the necessary capital available at that time to buy out his share of the partnership.
Providing a solution
Partnership Insurance is a means of solving the financial problems that can arise following the death of one of the partners, by:
• Creating a Buy/Sell Agreement, under which it is agreed that the partnership share of a deceased partner will be bought back on death at a fair open market price, and
• Arranging life assurance cover, to provide the necessary funds to enable the surviving partners to fund the buyout on death.
The Partnership Insurance arrangement brings benefits for both sides, in the event of the death of a partner:
The next of kin can rapidly realise the deceased’s share of the partnership for a substantial capital lump sum, while The surviving partners retain full control over the business by buying out their deceased colleague’s share of the partnership.
The Buy/Sell Agreement
As the name implies, a Buy/Sell Agreement is a legal agreement between the partners which provides that on the death of one of them:
• The surviving partners are obliged to buy the deceased’s share of the partnership at a fair open market value,
• The next of kin’s personal representatives are obliged to sell the share of the partnership back to the surviving partners.