Topic 15: The main advice areas Flashcards
What is a key employee/ key person in a business?
An important person in a business, whose leadership, experience, knowledge or skill plays an important part in its continued financial success. Their death or serious illness could cause the business financial problems through loss of profits, the need to recruit a suitable replacement, loss of goodwill or important contacts. Examples include the chairperson, managing director, head of marketing, head of sales and IT specialist.
What is a Partnership agreement?
Agreements about how the business will continue in the event of a partner’s death, and how their share will be dealt with.
What is a No Agreement?
Legally, the business will be dissolved without an agreement, and the deceased partner’s share will pass to their estate.
What is a Automatic accural?
The deceased partner’s share will automatically pass to the surviving partners in agreed shares. A life policy, equal to the value of their share, is arranged on the life of each partner in trust for their beneficiaries.
What is a Buy and Sell agreement?
On the death of a partner, the deceased partner’s share must be sold to the surviving partners, who must buy it. Each partner takes out a life policy in trust for the other partners to enable them to buy out the share. Not efficient for IHT purposes.
What is a Cross-option agreement?
On the death of a partner, the estate has the option to sell the deceased partner’s share to the surviving partners, who have the option to buy it. If either party chooses to exercise their option the sale must go through. Each partner takes out a life policy in trust for the other partners to enable them to buy out the share. Efficient for IHT purposes.
Why is budgeting important?
The need to budget underpins all other forms of financial planning. At
its simplest, it reflects the need to have sufficient funds to purchase the
necessities of daily living. It also enables people to determine how much they can spend on other items, for instance large‑scale purchases, leisure pursuits
and holidays, and provision for a secure retirement.
What is Shareholder protection?
Small businesses are often run as private limited companies
with a small number of shareholders, who are often family members or friends. In the same way that partners may
wish to buy out the share of a deceased partner, surviving shareholders in a small business will probably want to buy
the shares of a deceased shareholder to prevent the shares from going out of the close circle of existing shareholders.
The same types of scheme available for partnerships can be
used for shareholder protection.
What are common reasons for requiring income or capital?
- Short term emergencies
- specific purchases
- education fees
- gifts to children
- buying a business
- loan repayment
- funds for retirement
How to calculate the real rate of return in relation to inflation?
Nominal interest (growth rate) minus inflation rate
an investment paying 4 per cent interest at a time when inflation is 3 per cent is providing
a real rate of return of only about 1 per cent.
There are two main questions to consider in advising on estate planning:
- Has the client made a (valid) will?
- Has the client taken steps to mitigate inheritance tax liabilities?
In relation to inheritance tax, there are basically two approaches that people can take:
- try to avoid having to pay it; or
- make provision for paying it when it is due.
What are the main advice areas?
- budgeting
- protection
- borrowing
- savings and investment
- later life planning
- estate planning
- tax planning and offshore considerations
