In one of my relatively recent articles (before I got swept away on a wave of pre-Budget enthusiasm) I looked at the strange case of the linkage (and thus plummeting) of the Apple share price to the health of the great Steve Jobs. Along with many other much more informed commentators, I expressed surprise at the market reaction when all common sense would seem to indicate that the real fortunes and real value of a monster company, such as Apple, could not be so inextricably linked with the health of its founder.
Now when it comes to the fortunes and value of a private business, the “Jobs” phenomenon may well be justifiably at play. And this is something that financial advisers could do well to recognise. After all, they should have the core components and expertise to both sell the problem and deliver the solution to this very real, latent but so often not dealt with, challenge.
The business continuation (or keyperson) challenge is not a challenge confined to companies. It exists for most small businesses, however they are structured.
Take sole traders for example. In the majority of cases, the financial compensation solution required for sole traders looking to protect themselves and their family against the financial risk resulting from serious ill health or death will not be a traditional business continuation plan but a strategy founded on a personal protection solution.
This would usually be held in trust for the sole trader’s family and/or dependants. If income protection cover is put in place for a sole trader, this will need to be for their benefit and so no trust would normally be needed.
The required sum assured should be arrived at by determining the income/ capital needs of the family and dependants. The trust should, of course, not be a business trust but a personal trust, most probably a discretionary trust but possibly a bare trust if the sole trader knows for sure who they want to benefit and are happy that no change of beneficiary can be made.
If the sum assured is significant and there is a perceived risk that there may be a periodic charge, say, because the policy had a value as the life assured was in serious ill health at the valuation point, or the sum assured had been paid to the trustees but not distributed to beneficiaries so that the available nil-rate band could be exceeded, then the sole trader could consider splitting the policy into a number of smaller policies with the sum assured under each one being less than the nil-rate band. Each policy would be effected on a different day and held under a separate trust. This way, under the current law, each policy trust would be entitled to its own nil-rate band.
For stand-alone critical- illness cover, no trust would be needed, although should death follow soon after a serious illness, the unspent benefits would then be included in the taxable estate of the life assured.
Where a policy delivers benefits on the first to occur of the sole trader’s serious illness or death, then a split trust could be the answer. Under such a trust the whole of the sum assured would be paid, via the trustees:
– to the life assured if the occasion of payment is
– to the beneficiaries if the occasion of payment is death.
The sole-trader need for keyperson cover is perhaps too often overlooked or, at best, not seen as a business-related need. This is understandable where, as may well be the case, the sole trader’s business will cease on their death or serious illness.
Essentially, the objective will be to put funds into the hands of the family or dependants on the death or the sole trader on illness.
Be that as it may, the adviser may have a better opportunity to strongly engage with the sole trader in relation to this important (essentially family protection) need if the communication is linked to the impact that the cessation of income from the business would have in relation to the financial wellbeing of the sole trader and their family.
Each case will be different but this, more business-focused approach related to the needs of the sole trader and their family, might just stand a better chance of working.
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