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Insurance policy ownership...
Clients: Jackie and Carlo also had a business succession plan that included death and TPD insurance cover. The business was worth $3m and they each had additional cover for CGT of $450k. Jackie suffered a stroke and could no longer work.
Issue: Unfortunately the policies were set up with Carlo as the nominated beneficiary for Jackie's cover and vice versa. Once the $1.95m TPD proceeds were paid to Carlo, he paid the funds to Jackie's spouse who organised the share transfer to Carlo as agreed. The ATO taxed Jackie $450k on her capital gain of $1.5m as expected. Unfortunately the ATO also considered that the insurance payout was a capital gain in Carlo's hands as he was not related to Jackie. He was then also liable for approx $440K. Carlo did not expect that!
Solution: If Jackie and Carlo had self-owned their policies there would not have been any CGT payable on the proceeds. Jackie would still have been liable for CGT on the share transfer but, in Jackie’s hands, the proceeds wouldn’t have been subject to tax.
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Can the bank call in the loan?
Clients: Andy and Peter had borrowed $1m to fund their machinery upgrade and had both signed personal guarantees. Peter had recently passed away. Their business succession plan meant Peter's family received enough insurance proceeds to cover his equity in the business and the CGT liability. Peter's shares were transferred to Andy.
Issue: Andy received two phone calls. The first was from Peter's executor who was unable to wind up the estate because of the personal guarantee. Even though his business shares had been transferred, the bank was under no obligation to release the guarantee. The second call was from the bank - under the terms of the loan agreement they had the right to review the loan as one of the partners had passed away.
Solution: If Andy & Peter had additional Debt Cover insurance policies owned by the business, the business could have paid down the debt and had the guarantees released. Not only would that have been a better outcome for the business but it would have made life a lot easier for Peter's executor.
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Helping your clients with succession planning
Whether its personal or business succession planning, if your clients are concerned about an issue give us a call. We would love to help.
If you want to extend your skills in this area, you may like to attend a Business Succession Planning or Estate Planning seminar or workshop. For more information refer here.
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