Protecting Your Business Legacy: What Happens to Your Shares When You Pass Away?

Why succession planning for your shares is essential for business stability

Taking the time to consider the future of your shares is an important part of succession planning as it can significantly impact both your beneficiaries and the future of your business. Proper planning ensures that your shares are handled in line with your wishes, avoiding unnecessary disputes and governance challenges.

Personal considerations

Many shareholders prefer that their family or dependents receive cash rather than shares upon their passing. This is particularly relevant when family members are not directly involved in the business and have no desire to participate in its management or ownership.

Without a structured plan, shares may be passed on to individuals who may not be interested or equipped to handle business responsibilities, leading to complications.

Business considerations

From a corporate perspective, the sudden introduction of new shareholders—who may have no prior experience with or interest in the business—can present governance issues. An expanded shareholder base may complicate decision-making, leading to inefficiencies and potential conflicts. Ensuring business continuity and stability requires a clear strategy to manage the transfer of shares upon a shareholder’s death.

The importance of planning

To ensure that your shares are distributed according to your wishes, proactive planning is essential. Without a structured plan, your shares will form part of your estate and be distributed according to the terms of your Will. If you do not have a will, the rules of intestacy will determine how your assets—including your shares—are distributed. This may not align with your personal or business intentions.

Moreover, if the distribution of your shares under your will or the intestacy rules conflicts with existing corporate governance documents—such as company articles or a shareholders’ agreement—this can lead to disputes and uncertainty. Ensuring alignment between your will and these governing documents is crucial to avoid such conflicts.

Shareholders’ agreements and articles of association

A well-drafted shareholders’ agreement and carefully structured articles of association can provide clear directives on what should happen to your shares upon your death. These legal documents can include provisions such as:

• Compulsory transfer clauses – ensuring that shares are automatically transferred to specific individuals, existing shareholders, or back to the company upon death.
• Pre-emption rights – giving existing shareholders the first right to purchase shares before they are transferred to external parties.
• Valuation mechanisms – determining how shares should be valued upon transfer, ensuring fair compensation to your estate.

These agreements provide clarity, reduce uncertainty, and help maintain business stability.

Cross-option agreements and insurance protections

Another effective mechanism for managing the transfer of shares upon death is a cross-option agreement, which is often backed by life insurance. Under this arrangement:

• A cross-option agreement allows surviving shareholders or the company to purchase the deceased’s shares, ensuring business continuity.
• The deceased shareholder’s life insurance policy—written in trust—is used to finance the share purchase, ensuring that the deceased’s beneficiaries receive cash instead of shares.
• This approach prevents the business from inheriting unintended shareholders while ensuring that beneficiaries receive fair financial compensation.

Use of trusts for shareholding

For those considering trusts as part of their estate planning, it is essential to review company articles of association to confirm whether restrictions exist on holding shares within a trust structure. A properly structured trust can provide asset protection and tax benefits while ensuring that the shares are managed according to your long-term wishes.

Tax considerations

With recent changes in inheritance tax legislation and restrictions on business relief, it is more important than ever for business owners to review their estate plans. Proper planning can help maximise tax efficiencies and ensure that your beneficiaries receive the greatest possible benefit from your shares. Ensuring that your wills, corporate documents, and estate planning strategies are up to date is key to optimising tax reliefs available under current legislation.

How we can help

We regularly work with business owners, shareholders, and insurance providers to provide expert advice on governance, succession planning, and estate structuring. Whether you need assistance drafting a shareholders’ agreement, setting up a cross-option agreement, or reviewing your will in light of tax changes, we are here to help.

For tailored advice on securing the future of your shares and business, please do not hesitate to get in touch with a member of our team. We look forward to assisting you with your succession and estate planning needs.