Shareholder protection trusts


I have a client who is a shareholder in a small business. His co-shareholders have all joined at different times and when they have, each shareholder has put in place shareholder protection insurance. Because they were all relatively young and in good health, the premiums are very competetive. However, they have over-insured and once the cross option has been exercised, there will be a surplus. Each policy is written in to trust (about 6 different trusts, from different providers). Each of the shareholders have different requirements as to what they would like to happen to the surplus insurance in the event of their death. At the moment, each policy is written to benefit the co-shareholders.

Has anyone come across a similar situation and how did you deal with it?

One option would be to add in the widow/widower of the shareholder as a potential beneficiary but in some of the trusts, there is no option to add. Further, some have more convoluted requirements involving beneficiaries other than just the spouses. Could we create a ā€˜master trustā€™ to ā€˜mop upā€™ the surplus or would this be too messy given the number of different trusts/potential beneficiariesā€¦
Another option I considered was to create a new (non voting) class of shares and allocate one to each spouse so that they would be included as a co-shareholder, and to direct the Trustees in a letter of wishes. However, I am concerned about reservation of benefit if spouses are potentially beneficiaries of the trust.

Any advice/suggestions welcomeā€¦

Many thanks
Helen Gaskell
Marsden Rawsthorn

This is normally dealt with within the accompanying cross option agreement which would set out how any surplus or shortfall should be dealt with. It would however require all parties to agree so that the same thing happens irrespective of who dies rather than taking account of individual wishes.

Ian Smart
Royal London

1 Like

Hi Helen

I do lots of these schemes - the excess is retained by the company. This would be stated in the cross option agreement - usually.

You just need to draft a new cross option agreement indicating any excess is paid to the estate. The value ought to be fixed today and agreed for three years with a excess clause as discribed.

The proceeds if excessive would form part of the deceased estate for IHT. Another issue is how would the company account for the payment off its balance sheet? Income - dividend ?

This is why the company holds the residue on all COAs.

The articles of association may require amending to allow family members to transfer shares. Or at least there is no restriction of this action.

All wills need to leave the shares into a trust -

Richard Bishop