A partnership is a business owned by two or more people. Unless specific provision is made in the partnership agreement (and very many partnerships have no formal agreement), the partnership will cease on the death of a partner. When that happens, the deceased partner’s estate becomes entitled to their share of the business.
This can mean a choice:
- The remaining partner or partners pay the deceased partner’s estate a sum of money agreed to be the value of the deceased partner’s share.
- The surviving partner or partners and the deceased partner’s beneficiary carry on in business together – perhaps with the new partner having little interest or skills in the business.
For example, John and Jane are in partnership and Jane dies. Jane’s sole beneficiary, her daughter Kylie, is keen for the business to continue, and so is John, who could not afford to buy out Kylie’s interest anyway.
Unfortunately, Kylie is unable to play any active part in the business, and John resents having to split the partnership’s income with a sleeping partner who contributes nothing other than capital to the business.
The solution
Two main options are available to meet such needs, and are illustrated below using the example of a simple two partner business owned by A and B. (Other options are available, but are generally not as attractive):
- A double option agreement Under this agreement, the surviving partner has the option to buy the share in the business from the deceased partner’s estate – in other words, they can make the estate sell the share. The deceased partner’s estate can also exercise an option to force the surviving partner to buy. There must be an agreed basis for valuing the business. Generally, each partner takes out a life insurance policy on their own life, written under trust to benefit the other partner. So if A dies, B can decide to buy out A’s share from the proceeds of the policy on A’s life.
- Automatic accrual On A’s death, the business passes automatically onto B. No buyout is involved. Instead B’s beneficiaries get the proceeds from a life insurance policy B took out on his or her own life, written in trust for his or her beneficiaries.
The end result of both solutions is that the remaining partner continues to run the business and the deceased partners’ beneficiaries receive a fair price. Without these arrangements, the business could be in danger and the beneficiaries might receive little or nothing.Last Updated
