What is Partnership Protection Insurance?
A partnership is defined as “the relationship that exists between persons carrying on a business in common with a view to profit”.
The 1890 Partnership Act states that, unless a partnership agreement is set up to say otherwise, the partnership must be dissolved on the death of a partner.
This gives powers to the deceased partner’s heirs. They can, if necessary, sue for a share of the value of the dissolution profits.
So there are two key issues:
- Ensuring the partnership can continue when a partner dies.
- That surviving partners maintain control of the partnership.
What is a partnership agreement?
This ensures that the partnership doesn’t have to be dissolved and that the surviving partners can purchase the deceased partner’s share from their heirs, if they want to.
As well as a partnership agreement, one of the following should be set up alongside the protection plans:
- Buy and sell agreement
This binds the deceased’s heirs to sell the share of the partnership and the remaining partners to buy it.
- Cross option agreement (also called a double option agreement)
As per the buy and sell agreement, but this time the deceased’s heirs have the OPTION to sell and the surviving partners have the OPTION to buy, within certain timescales. Whichever party invokes the agreement, the other party must abide with their wishes. This form of agreement is seen as more flexible for inheritance tax purposes that the buy and sell agreement.
For these first two agreements to work, life assurance needs to be put in place to provide the surviving partners with money to purchase the partnership share from the deceased’s heirs.
- Automatic accrual method
More, complicated, but it does avoid the surviving partners needing to purchase the share of the partnership from the deceased partner’s heirs.
The deceased partner’s share passes automatically to the surviving partners, so there is no need for life assurance to provide cash with which to purchase the share from the deceased’s heirs. Personal life assurances may still be considered to “compensate” the heirs for the loss of the share of the partnership.