Question : I am a partner in a firm and have a substantial amount built up in my capital account which is needed as working capital. My partners and I are looking at what should be done to protect everyone in the event of death. What would you suggest?
Ewan Boyle, director of Johnston Campbell Ltd, Independent Financial Advisers, says:
This is a typical issue that affects many partnerships and limited companies. Being aware of the issues is critical, as failure to make adequate provision will lead to problems for both your dependents and the remaining partners in the event of death.
The first thing you need to consider is what your partnership agreement states should happen to the capital account in the event of a partner's death. Typically, this will indicate that in the event of death any monies due should be paid out as a lump sum or staged over a set time period.
You have indicated that the capital account is needed as working capital so if your dependents required the capital to be paid out, it is likely that this would have serious cash flow implications for the business. It is also unlikely that any lender in the current circumstances would lend the monies to the firm so any withdrawal could put the trading position of the business in jeopardy.
What you should therefore consider is having life assurance policies on each partner's life that would pay out an amount that would at least cover the capital accounts. This means that in the event of a partner's death, a lump sum would become available that could then be given to the dependents and discharge any funds that would be owed to them by the business.