Under an individual purchase arrangement, each business owner takes out a protection plan on their own life for the value of their share of the business. The plans are written under trusts for the benefit of the other co-shareholder, members or partners. In the event of the death or critical illness of one of the business owners, the others will receive the proceeds of the plan from the trust to enable them to fund the purchase the shares of the deceased or critically ill business owner.
Alternatively, if there are only two or three owners it is possible for each owner to take out plans on each other’s lives so that in the event of one of the owners dying or suffering a critical illness, the proceeds of the plan will be payable to the surviving business owners.
In both cases it is recommended that a cross-option agreement is made between the business owners in order to regulate the sale and purchase of the share of the business. The cross option agreement provides that on death or critical illness, the deceased’s personal representatives have the option to sell the deceased business owner’s share of the business and the surviving business owners have the option to buy it. The cross-option agreement usually provides that the options must by exercised within 3 months of the date of death or critical illness and once either party to the agreement exercises an option, the agreement becomes binding on the other party. For critical illness it is also possible for the agreement to give the person suffering a critical illness the option to sell immediately. The option for the other owners would deferred for a period, typically 12 months, and could only be exercised if the ill person does not return to work within that period.