I am researching Shareholder Protection Insurance and wanted to know the purpose of a cross-option agreement and what this means for my business.
A cross option agreement can also be known as the double option or put and call agreement.
As the preferred vehicle for Shareholder Protection Insurance, the cross option agreement provides the surviving shareholders with the option to buy the deceased business owners share of the business.
In addition to the surviving shareholders being able to call their option to buy the shares, the legal representatives of the deceased’s estate also have the option to sell the shares of the deceased business owner to the remaining shareholders.
In either case, whether the remaining business owners want to buy the shares or the legal representatives want to sell, the agreement ensures the option is exercised.
The cross option agreement is set up in this manner to ensure there is no binding sale, i.e. in certain circumstance neither party could exercise their option which means business property relief for inheritance tax purposes can be preserved.
In the process of setting up the appropriate business protection it should also involve setting up a cross option agreement with all the directors / partners in the business, enabling the remaining directors or partners to purchase the share of the business from the deceased’s estate.
This agreement in turn provides the dependents with a willing buyer and with cash, instead of shares or an interest in the business ensuring the right people remain in control of the business.
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