“Contingent Liability Briefcase”
Sanlam Business Market
Structuring the Contingent Liability Solution
Sanlam Business Market
Financial Solutions for Business Owners
“Contingent Liability Briefcase”
Sanlam Business Market
This presentation gives you an overview of the contingent liability
policy structure, the tax implications of the structure as well as the
importance of the agreement.
The support material is available in English and Afrikaans and can be
downloaded from the Contingent Liability briefcase or Sanport.
Structuring the Contingent Liability Solution
Sanlam Business Market
Financial Solutions for Business Owners
The 1-2-3 of Business
Securing the Surety
Three (3) Primary Funding Mechanisms
Pay Cash
Borrow the
Money
Purchase a
Life Assurance
Policy
Requires large sums of liquid assets that may not
be readily available, particularly at the time of an
unforeseen event. May have to liquidate valuable
personal or business assets below market value in
order to raise cash quickly.
The loss of an owner or key person may impair the
credit rating of the business and its ability to borrow.
Principal plus interest must be paid. This could be a
tremendous strain on the business budget.
Funds available immediately. See structure of the
solution on the next slide
4
Contingent Liability
Structuring the Solution
1. Bank provides the loan
Business
Bank
6. Business repays the loan
4. Business
takes out a
life/disability
policy on the
life of the
business
owner
5.
Sanlam
pays the
proceeds
to the
business
Sanlam
3. Agreement
between the
business owner
and the
business
5. Business cedes
policy to the bank,
Sanlam pays the
proceeds of the
policy to the bank
2. Business
owner
stands
surety for the
loan
Business
Owner
If the solution is structured correctly
● No income tax payable
− Premium not tax deductible
− Benefit paid free of tax
● No CGT payable
● Estate duty payable
− Less a “rebate” (premiums paid
plus 6% compounded)
− Estate duty payable the
business
● The contingent liability problem is
solved!
Why are contingent liability policies estate dutiable?
SARS practice note – “Estate duty implications
of key man policies”
Author: Ina Marx
Contingent Liability
Understanding the tax implications of the structure
Contingent Liability
Understanding the tax implications of the structure
Contingent Liability
Understanding the tax implications of the structure
Contingent Liability
Understanding the tax implications of the structure
The importance of the agreement
Between the business and the business owner
● Purpose of the agreement is to protect the personal estate of the business
owner where he/she has guaranteed the debts of the business.
● Death / Permanent Disability Benefits
● Premiums – paid by business when due
● Order in which proceeds of policy must be applied
1. Pay holders of any surety, the amount to which the business is lawfully
indebted
2. Pay any amount owed by the business to the business owner, whether
on loan account or otherwise
3. Utilise any surplus in the best interest of the business, at its discretion
The Contingent Liability Agreement, ready for the client’s signature,
comes standard when a 1-2-3 of Business is requested.
The importance of the agreement
Between the business and the business owner
● Irrevocable right of first option to purchase the policy from the company
− Securities cancelled
− Contingent liabilities paid in full
− For a price equal to the total of premiums paid
− Business shall not dispose, alter, cede or terminate the policy without the
written consent of the business owner
● Binding effect on the parties’
− estates, executors, heirs, liquidators, administrators, successors-in-title
and assigns
The Contingent Liability Agreement, ready for the client’s signature,
comes standard when a 1-2-3 of Business is requested.
The 1-2-3 of Business