This is a legal document laying out what will happen to the partnership if one partner dies. If there is no such agreement, the partnership will automatically dissolve if one of the partners dies.
The most common agreement used is a cross option agreement, which is also known as a double option agreement. This gives the remaining partners the option of buying a deceased partner’s stake in the business (the “call option”), and the beneficiaries of the deceased’s estate the option to sell it (the “put option”). If either party wants to exercise their option, the others are legally obliged to allow them to do so. Usually the agreement will stipulate that the remaining partners have three months to decide if they want to buy, whilst the family is given six months for their decision.
You can also incorporate plans for a partner leaving due to a critical illness; if you arrange insurance to cover this event, it is common (but not mandatory) to use a single option agreement for this benefit, rather than a double option. This means that if a partner is diagnosed with a critical illness covered by the insurance policy, the rest of you do not have the right to force them to sell their share of the partnership. However, the ill owner does still have the right to sell their interest and it could be seen as a good time for them to obtain a cash sum without damaging the financial stability of the firm.
The agreement should also specify in what proportion each partner’s share should be purchased by the remaining partners.
This is the most popular type of share agreement, as the non-binding nature of the sell and buy options means that each partner’s share will still qualify for full Business Property Relief for Inheritance Tax (IHT) purposes, provided the individual held them for at least two years prior to death.