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In the event of the death of a shareholding director, it is essential
that arrangements are made to avoid shares passing to a beneficiary
who has no interest in the company, no ability to contribute, or
even worse, a desire to interfere or to introduce outsiders.
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If the surviving directors are unwilling or unable to buy the shares,
however, this could result in them being sold elsewhere. In these
circumstances, restrictions regarding the transferability of the
shares laid down in the company's Memorandum and Articles of Association
may become inoperable.
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To avoid this onward sale, therefore, a pre-arranged scheme should
be put into place to facilitate the purchase of the shares of a
deceased director from the estate.
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Both funding and agreements will be along the lines of those used
for partnership protection, and most insurance companies will provide
draft documents for use with their policies.
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When suitable life insurance policies are taken out, as the directors
will probably be at different ages, there will be some inequality
of cost because the older directors will be paying more in premium
but with a lower expectation of benefit. One way to avoid this problem
is by the directors making cash payments between themselves.
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Small differences in premium which are handed over are unlikely
to create tax problems, as they escape under the small gifts or
normal expenditure exemptions. Larger premiums, however, may be
subject to tax.
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The differences in premium to be handed over to co-directors would
be apportioned relative to the shareholding.
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When calculating the value to place on shares to propose for a
suitable sum assured, do not forget to take into consideration the
value of directors' loan accounts i.e. undrawn dividends and profits.
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Withdrawing cash from the business may often prove more problematic
than share purchase