Question
I founded a successful business 20 years ago with two others. All three of us are actively involved in its day-to-day management. As it is September, I took another look at my will where I have bequeathed my shares in the business to my wife.
While I trust my fellow directors, I am not sure that my wife will get the full benefit from these shares going forward as she will not be actively involved in the running of the company.
How do I structure my affairs to ensure that she is fairly treated?
Answer
There are many ways of extracting value from a company and if someone is not actively involved and is thought to be benefiting by more than the value that is being added, they may find the dividend flows stagnating while the executive directors improve their remuneration from other structures.
Unless your spouse or children have a desire to get actively involved with the company, it is often best to make a clean break. This can be set up as follows:
You should get an independent person the value of the company so that you know exactly what your shareholding is worth. This should be done annually to ensure that you are always working with the correct numbers. SARS does offer guidelines on how they could go about valuing a company.
Your co-directors would take out life insurance cover on to the value of your shareholding. They would pay the premiums on this cover in the same ratio that they would enjoy the benefit payout. This cover of should be revised annually to take into account the increasing value of the business.
This is often known as a buy and sell contract. Here your fellow directors commit to buying your shares in the company upon your death. This would be funded by the life insurance that they took out on your life.
What is nice about the solution is that it is a clean break. Should you pass away, your wife would be paid out the full value of your shareholding in the company. She need not worry about your fellow directors doing things that may prejudice her income stream. She would have access to a capital sum which you could invest to provide her with an ongoing flow of income that she can control.
On the other hand, your fellow directors would have more freedom to make decisions on the direction of the company without having to consider shareholders who are not involved with the company.
This solution can also be used to pay back director loan accounts without putting too much financial strain on the company.
You can also use this solution to pay out a benefit should a director become permanently disabled and unable to actively contribute to the running of the business.
There are times when life insurance can make a significant difference. This is certainly one of those instances.
Kenny Meiring MBA CFP ® is an independent financial adviser who helps people put investment and risk structures in place to live wonderful lives. You can contact him on 082 856 0348 or at Financialwellnesscoach.co.za. Please send your questions to kenny.meiring@sfpwealth.co.za