Partnership Protection can be written in one of three ways:-

• Own life policy held under business trust
• Automatic accrual-Own life policy held under a flexible trust
• Life of another policy

Own life policy held under business trust

Each partner takes out an own life policy for the value of their interest. This policy is written on a specified term basis or until retirement age. Each policy is then held under a business trust for the benefit of the remaining partners. If a partner dies or becomes critically ill, the partners use the funds from the trust to buy the partnership interest from the deceased/ill partner’s estate.

Each partner assigns their policy when it is set up and is known as the ’settlor’ of the trust they have created. The settlor is automatically a trustee and the additional trustees will usually be all or some of the remaining partners in the arrangement.

It is recommended that some form of legal agreement is put in place which ensures that the proceeds of the policy are used to buy the deceased/ill partner’s share and that the deceased/ill partner’s legal representatives will sell the shares to the remaining partners. A cross option agreement or buy and sell agreement is preferable for this purpose.

Life of another policy

This arrangement is best suited to partnerships where there are only two or three partners. Effectively each partner takes out a life assurance policy on the other partner/s and pays the premiums for the policy/ies. On the death of the life assured the claim proceeds would be paid out to the partner who had taken out the policy. The claim proceeds would form part of their estate for inheritance tax purposes.

The main disadvantage of this type of agreement is that if there is a large difference in ages between partners, younger partners can find themselves paying higher premiums for older partners. If the partnership had several partners and this agreement was used then younger partners would find it even harder.This agreement is also inflexible if partners leave the partnership or new partners join.

Automatic Accrual

The partners complete an automatic accrual agreement drawn up by their solicitors in accordance with the provisions in the partnership agreement. Under the terms of this agreement the partner’s interest automatically passes to the remaining partners on death so this agreement does not involve buying any interest. As part of the agreement, each partner must apply for and maintain their own life policy for the value of their partnership interest.

So long as each partner maintains their life insurance policy, their obligations to fellow partners are met and their obligations to their estates are satisfied too. If the value of the proceeds of the life policy are less than the value of the partnership interest, then the remaining partners will have to make any shortfall to the deceased partner’s estate.