Structuring the contingent liability solution
Contingent liability Structuring the contingent liability solution Sanlam Business Market This presentation gives you an overview of the contingent liability policy structure, the tax implications of the structure as well as the importance of the agreement. The support material is available in English and Afrikaans and can be downloaded from the Business Insurance Briefcase or Sanport. Most business owners have signed surety for the debt in their business If they have an overdraft, then they have signed surety Most businesses have debt Most business owners have not secured that debt Business owners however do not understand what they have done when they signed surety They do not understand the implications and the seriousness of surety If a business owner has debt, it is therefore crucial that we cover the debt first and then the buy & sell. Financial Solutions for Business Owners
The 1-2-3 of Business Financial Solutions for Business Owners
Securing the Surety Three (3) Primary Funding Mechanisms Pay Cash Borrow the Money Requires large sums of liquid assets that may not be readily available, particularly at the time of an unforeseen event. May have to liquidate valuable personal or business assets below market value in order to raise cash quickly. The loss of an owner or key person may impair the credit rating of the business and its ability to borrow. Principal plus interest must be paid. This could be a tremendous strain on the business budget. Purchase a Life Assurance Policy Funds available immediately. See structure of the solution on the next slide The cheapest form of insuring the contingent liability is via a life insurance policy. If a life insurance policy is used, the structure of the policy is noted on the next slide. Financial Solutions for Business Owners
Contingent Liability Structuring the Solution Business Bank 1. Bank provides the loan 6. Business repays the loan 5. Business cedes policy to the bank, Sanlam pays the proceeds of the policy to the bank 3. Agreement between the business owner and the business Sanlam 4. Business takes out a life/disability policy on the life of the business owner 5. Sanlam pays the proceeds to the business Business Owner 2. Business owner stands surety for the loan The business also has the option of ceding the policy to the bank. This option might not be suitable if there are multiple creditors. Financial Solutions for Business Owners
If the solution is structured correctly No income tax payable Premium not tax deductible Benefit paid free of tax No CGT payable Estate duty payable Less a “rebate” (premiums paid plus 6% compounded) Estate duty payable by the business The contingent liability problem is solved! Financial Solutions for Business Owners
Why are contingent liability policies estate dutiable? SARS practice note “Estate duty implications of key man policies” Author: Ina Marx Financial Solutions for Business Owners
Contingent Liability Understanding the tax implications of the structure The aim here is to show the difference between a company-owned policy and a policy owned in the personal capacity of the guarantor. Financial Solutions for Business Owners
Contingent Liability Understanding the tax implications of the structure The aim here is to show the difference between a company-owned policy and a policy owned in the personal capacity of the guarantor. Financial Solutions for Business Owners
Contingent Liability Understanding the tax implications of the structure The aim here is to show the difference between a company-owned policy and a policy owned in the personal capacity of the guarantor. Financial Solutions for Business Owners
Contingent Liability Understanding the tax implications of the structure The aim here is to show the difference between a company-owned policy and a policy owned in the personal capacity of the guarantor. Financial Solutions for Business Owners
The importance of the agreement Between the business and the business owner Purpose of the agreement is to protect the personal estate of the business owner where he/she has guaranteed the debts of the business. Death / Permanent Disability Benefits Premiums – paid by business when due Order in which proceeds of policy must be applied Pay holders of any surety, the amount to which the business is lawfully indebted Pay any amount owed by the business to the business owner, whether on loan account or otherwise Utilise any surplus in the best interest of the business, at its discretion The Contingent Liability Agreement, ready for the client’s signature, comes standard when a 1-2-3 of Business is requested. Financial Solutions for Business Owners
The importance of the agreement Between the business and the business owner Irrevocable right of first option to purchase the policy from the company Securities cancelled Contingent liabilities paid in full For a price equal to the total of premiums paid Business shall not dispose, alter, cede or terminate the policy without the written consent of the business owner Binding effect on the parties’ estates, executors, heirs, liquidators, administrators, successors-in-title and assigns The Contingent Liability Agreement, ready for the client’s signature, comes standard when a 1-2-3 of Business is requested. Financial Solutions for Business Owners
The 1-2-3 of Business Financial Solutions for Business Owners