‘Nothing is certain but death and taxes’ - Shareholder Arrangements on Death

Why plan for the future?

Whilst neither tax nor death can be avoided, much can be gained by planning for the death of a shareholder by agreeing now, what shall happen in this event.

Have you considered, as a shareholder, what happens to your shareholding on death?  Do you have family who would wish to become involved in the business or indeed, are already involved in the business whether as employees or holding shares themselves?  Does your family have no involvement in the business and an expectation that when you meet your maker, your shares will somehow be purchased and the proceeds paid to your estate?

The articles of association of a company (and a shareholders agreement if one exists) govern what happens to shares on the death of a shareholder.  Model articles typically allow shares to transmit to your estate, whether under your will (if you have one) or the rules of intestacy (if you don’t have a will) and allow the beneficiary to be registered as the holder of those shares.  There is no right for shares to be purchased on death.  If shares simply transmit as you have not put any alternative arrangements in place, those shares may increase or reduce in value over time, the holder of shares would be required to be involved to the extent of shareholder voting (but have no right to be involved in the day to day management of the company) and the Directors’ would be responsible for recommending dividends, if any.

You may prefer that in the event of death, your estate will dispose of your shareholding and receive the proceeds of the sale.  In this case, it is important to consider:

• What will the value of those shares be?
• Who will purchase those shares?
• Where will the funds come from to purchase those shares?

What we can do

At Napthens, our Corporate Team and Wills & Estate Planning Team can talk to you and assist with putting measures in place to suit your needs, taking into account the tax consequences for your estate.  We deal with these matters on a regular basis involving the following:

• Consideration of whether you and the other shareholders may wish to take out life insurance on each of your lives for the benefit of the company or the surviving shareholders to provide the funds to purchase shares in the event of death using the proceeds of the policy.
• The provision of bespoke articles of association dealing with compulsory transfer events including death, ensuring that the company or continuing shareholders have a right to purchase shares from a deceased shareholder’s estate.
• The provision of a Cross Option Agreement setting out the procedure for the exercise of options to sell and purchase shares from a deceased shareholder’s estate and the price or valuation basis for those shares.