1. Structuring the contingent liability solution

2. 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

3. The of Business
Financial Solutions for Business Owners

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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 of Business is requested.
Financial Solutions for Business Owners

13. 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 of Business is requested.
Financial Solutions for Business Owners

14. The of Business
Financial Solutions for Business Owners