Partnership insurance is a must

QUESTION: I am a partner in a business and have been told that in the event of the death of my co-partner there could be considerable problems for the business. Can you offer some advice on this matter?

ANSWER: A partnership is simply a group of two or more individuals who work together with a view to making a profit, which is shared in stated proportions. The proportion often reflects how long each has been in the firm, and how much money they invested to join, or create, the firm.

The usual objective is for each of the partners to make enough profit on a year-by-year basis to create and enhance their lifestyle, to continue in business long-term, and to retire with sufficient capital and income to support that lifestyle.

Death, illness and disability can destroy all these plans unless there is some forward thinking. However, running a business is a full-time occupation that requires constant focus on short-term needs, often at the expense of long-term strategic planning.

Succession planning is one of those long-term issues that often gets ignored altogether, until it becomes a necessity as a result of the death or disability of a co-partner, at which point it becomes essential. Seeking the advice of an independent financial adviser early on in your business partnership can prepare and protect you from the financial and emotional strains such a situation presents.

The exact entitlement of a partner on their death should be detailed in the partnership agreement. Typically this will state that the deceased's estate is entitled to receive the deceased's share of the profit in the year of death, and their share of the partnership assets.

This agreement will usually be enforceable by any heirs to the deceased's estate, and so puts an obligation, even a burden, on the remaining partners to meet the payment, whatever the financial health of the firm.

Heirs can enforce their rights against the wishes of the remaining partners, and if need be they have the legal right to put the other partners out of business if that's the only way to raise the cash. So it is essential that the partners make sure the partnership can continue in the event of the death or disability of one of them.

Where necessary this means ensuring that the surviving partner or partners will have sufficient funds to purchase the outgoing partner's share, rather than having to rely on borrowing, or being forced to bring outside capital into the business.

This security can be achieved through Partnership Insurance, which is an arrangement designed to ensure that the partnership share is retained by the remaining partners, and the outgoing partner or their spouse/dependents receive full and fair compensation.

Creating the funds is achieved with a suitable life insurance contract designed to pay out a cash sum on death or diagnosis of a critical illness, making sure that the funds go to the right people.

This is achieved by using a suitable Business Trust to hold the life assurance or critical illness policy. The trust ensures that the money is paid to the correct parties - usually the remaining partners.

A written agreement is the final piece of the jigsaw. This ensures that the recipients of the proceeds of the life assurance contract, which in this case will be the remaining partners, use the funds to purchase the outgoing partner's shares, or their heirs'.

- The writer is a Chartered Insurance Broker, at Nexus Insurance Brokers L.L.C., one of the leading financial advisers in the region. The opinions expressed here are the author's own and do not necessarily reflect the views of Gulf News. if you have any questions, please e-mail to advice@gulfnews.com. Also, you can visit www.nexusadvice.com