PROVIDE LIQUIDITY FOR YOUR HEIRS
Smart Life Insurance for Business Owners
A Last Survivor Death benefit (LSDB) policy is another nice estate planning and business funding option.
The policy was primarily introduced to provide liquidity for the heirs on the death of the last surviving person. The policy has a few nice benefits:
- It’s about a 1/3rd of the price compared to single-person insurance.
- All premiums cease on the death of the first life assured.
Because of the price point being much lower than regular insurance, we’ve found that it’s a good policy for children and business partners to take out on their parent’s / partners’ lives. Premium is affordable, if one of the lives assured dies, no more premiums, and on the death of the second assured life the benefit is payable.
Examples:
Business assurance: Buy & sell policies for 100% business owners (no descendants)
Facts:
- Mr. Roux is the 100% share owner of a company that provides travel services.
- Mr. Roux is married to Mrs. Roux who is employed by this company, and she is capable of running this business on her own if Mr. Roux passes away.
- Mr. and Mrs. Roux have no family who may be interested in continuing with the travel business once the last survivor of them passes away.
- Diana is employed by the company, and she has shown a keen interest in management and aspires to be a business owner one day.
Solution:
- One-sided Buy and sell policy with a LSDB.
- Mr. Roux will provide that on his death his 100% shareholding in the business is bequeathed to Mrs. Roux.
- Diana insures Mr. and Mrs. Roux’s lives in a LSDB for the amount that the business is worth.
- On the death of Mr. Roux, the business will continue with Mrs. Roux as the sole shareholder.
- Diana no longer needs to pay the premium on the LSDB policy.
- On Mrs. Roux – the last survivor’s death, the policy proceeds are paid to Diana as the Policy owner.
- In terms of a Buy and Sell agreement drafted by a legal adviser, the LSDB policy benefit must be used by Diana to purchase the company shares from Mrs. Roux’s deceased estate and the executor of the deceased estate must pay the shares to Diana in turn for the agreed upon purchase price.
Policy Structure:
- Policy owner: Diana
- Life assured Mr. and Mrs. Roux
- Premium payer: Diana
- Beneficiary: None
Important: In this example, there will be estate duty on the policy as a deemed asset in the last survivor’s deceased estate because the buyer, Diana, was not a partner in the business when the policy was taken out on Mr. Roux’s life.
Business assurance: Buy & sell policies for 50% of business owners.
Facts:
- Mr. Vlad and Jack Black each own 50% shares in a company that imports Vodka from Russia.
- Mr. Vlad is married to Mrs. Vlad who is employed by this company, and she can run this business in partnership with Jack Black if Mr. Vlad passes away.
Solution:
- One-sided Buy and sell policy with a LSDB arrangement.
- Mr. Vlad’s will provide that on his death his 50% shareholding in the business is bequeathed to Mrs. Vlad.
- Jack Black insures Mr. and Mrs. Vlad’s lives with a LSDB for the amount that the business is worth.
- On the death of Mr. Vlad, the business will continue with Mrs. Vlad and Jack Black as shareholders.
- Jack Black no longer needs to pay the premium on the LSDB policy.
- On Mrs. Vlad – the last survivor’s death, the policy proceeds are paid to Jack Black as the Policy owner.
- In terms of a Buy and Sell agreement drafted by a legal adviser, the LSDB policy benefit must be used by Jack Black to purchase the company shares from Mrs. Vlad’s deceased estate and the executor of the deceased estate must pay the shares to Jack Black in turn for the agreed upon purchase price.
- Mrs. Vlad’s estate is now liquid with a cash payment which can be used for estate liquidity or a cash bequest, and Jack Black is the 100% owner of the company.
Policy Structure:
- Policy owner: Jack Black
- Life assured: Mr. and Mrs. Vlad
- Premium payer: Jack Black
- Beneficiary: None
In this example, there will be no estate duty on the policy as a deemed asset in the estate of the last survivor because Jack Black and Mr. Vlad were partners in the same business when the policy was taken out.
Our Services:
At SME.TAX we do more than just help our clients with estate planning…
We are in fact your “one stop SME shop”, assisting with everything from Accounting, Business Management,
BEE, Consulting, Company Registration to Payroll and Mentoring.
For more information, please visit our website www.sme.tax or give us a call on 012 021 0829
