What is Corporate Co-Director Insurance?
Simply it is an insurance protection policy owned by the company and is affected for an amount that matches the monetary value of each Director’s business share.
The Directors of a private company are often the major shareholders and are charged with making the key business decisions for the firm. Think of Ben & Jerry’s as an example.
A strong and successful business will depend on the varied skill sets and experience of the main directors and their close co-operation with each other.
The premature death, or a serious illness of a company director could have severe ramifications for the surviving shareholding directors and for the deceased’s successor and family.
The shares of a private company are illiquid by nature and there may not be a ready market such that the next of kin is left with a paper asset with limited Income producing ability.
The business could be challenged due to the loss of the director’s (deceased) skills set and may then be faced with the twin prospect of replacing that individual and/or if that director held more than 50% of the shareholdings, the loss of control and trying to appease the deceased directors successor who may have limited business expertise or a different vision for the business.
The best and often most preferred outcome for the surviving shareholders is that the company enters into Corporate Co-Director Insurance, so that the company can buy back a deceased directors shareholding from his next of kin or personal representatives on his/her death or from a director who suffers a long term serious illness.
What Corporate Co-Director insurance is designed for is to have insurance in place to the value of each company Directors business shareholding and then to provide that sufficient funds are then available to the Company (policy owner) if the contingency event materializes (Director’s death) such that the company is in a position to buy back the shares from the deceased directors representatives and thereby navigate the smooth transition and retain control of the business.
- The Company then has funds available to buy the deceased director’s shareholdings without the need for external finance or depletion of reserves.
- The surviving directors can maintain the control of the business as the deceased’s shares are purchased back by the company and then cancelled.
- The successor of a deceased director receives monetary compensation for their shares.
- The company pays for the cost of the life assurance on behalf of each director.
Example: Co-Director Insurance
Assume that the Company XYZ Ltd had a value of €3 million owned between the three shareholders: Robertson (40%), Maguire (40%) and Kelly (20%)
XYZ Ltd completes 3 Life assurance plans in the amount of each shareholders valuation: €1.2 million Life Cover for directors Robertson & Maguire and €600,000 for Kelly
XYZ Ltd owns the policies and pays the premiums
Director Maguire dies, after his death XYZ Ltd receives a payment of €1.2m and the company then buys back the shares from the successors to Maguire’s estate under a ‘Buy & Sell’ agreement.
The Corporate Co-Director Insurance policy can only be arranged on a ‘Life of Another’ basis.
The company is effectively the policy owner and each of the Directors is the life insured. The premiums paid by the company are not admissible tax deductions, but the proceeds are exempt form corporation tax.
The company must enter into a legal agreement called a ‘Double Option’ or ‘Buy/Sell ‘agreement with each of its directors. (in compliance with Companies Act 2014). Effectively this agreement then allows the company to have the option to buy the deceased directors shares from their successors at a fair open market price, it also permits the successor to have the option to sell their shareholding to the company.
Legal and taxation
With the complexity around many corporate share purchase structures any amendment to the share protection insurance should not be considered without the input and review by the company’s legal and taxation advisors, as it must comply with Company and Revenue law (power of a company to purchases its own shares).
Tax Treatment where Buy-Back not treated as a Company Distribution
On the Directors death, the deceased director is not liable to CGT on his/her shareholding. The shares are deemed to be acquired by the successor at their market value at date of death. If the successor sells the shares to the company at a later stage, any increase in the value of those shares from acquisition to disposal will be liable for CGT.
The spouse of a deceased director has no liability to CAT if they inherit the shares.
There are a few moving parts when it comes to arranging Corporate Co-Director Insurance while the shareholder / directors are focused on running a business.
If you would like to hear the full list of the options available to your company, please contact me and I would be happy to schedule a time for a 15 min. chat about your company’s protection needs and how I can help you achieve them.