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Absolute Entitlement Trust

A Trust where a Beneficiary is absolutely entitled to a Trust Asset as against the Trustee (i.e., they can direct the Trustee to transfer the Trust Asset to them or their nominees). It is not necessary that the Beneficiary have given any direction to the Trustee.

Any Occupation TPD

TPD Insurance Cover where the Life Insured may only receive the Insurance Proceeds if they are totally and permanently disabled from performing the duties of any occupation (not just the duties of their own occupation).

Arm's Length Trustee

A Trustee that is not personally or commercially related to any of the parties to the Business or the Agreement. As a result, it is not likely to breach any agreement or exercise any discretion or power in favour of one party to the disadvantage of others.

Asset Need

An Insurable Need relating to the Life Insured's Equity in the Business (including the Purchase Price of the Equity, any Capital Gains Tax payable with respect to the disposal of the Equity, and any transactional costs, such as stamp duty, legal fees, accounting fees and valuation fees). The CGT Need relates to the Asset Strategy, but is more correctly identified as personal Cover earmarked to pay a Tax Liability that arises at the time of the Insurable Event.

 

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Bare Trust

An Absolute Entitlement Trust where the Beneficiary has no further obligations to perform other than the transfer of the Trust Property to the Beneficiary (or its Nominees) in accordance with the Beneficiary's direction. A Bare Trust is an example or subset of an Absolute Entitlement Trust. Since the clarification of the meaning of the term Absolute Entitlement Trust, the concept of a Bare Trust is no longer relevant to the taxation of Insurance Proceeds.

Beneficiary

A person or entity for whose commercial benefit the Trustee of a Trust holds and manages the Trust Assets.

Beneficial Owner

The person or entity that enjoys the commercial benefit of the Asset or the Trust Asset. The Beneficial Ownership of an Insurance Policy determines the availability of the CGT exemption with respect to Death Benefits. If there is no Trust, the one person or entity will be both the Legal Owner and the Beneficial Owner (the ownership is not split). In the case of a Discretionary Trust, the Trustee is regarded as the Beneficial Owner of the Insurance Policy for CGT purposes.

Business Entity

The legal entity or vehicle which legally owns and carries on the whole or any part of a Business (e.g., a sole trader, a partnership, a company, or a trust). A Business Structure sometimes consists of a number of different Business Entities, each of which holds different assets or carries on different business activities.

Business Family

All of the parties that have a direct or indirect financial interest in the Business or the distribution of the Insurance Proceeds (including the Life Insured, their Estate and Beneficiaries, the Continuing Proprietors, their Related Parties, the Business and its Creditors).

Business Family Will

A metaphor or alternative description for a Business Insurance Trust Agreement which recognises that a Will and a Business Insurance Trust Agreement share the dual characteristics of a Trustee and directions to the Trustee with respect to the distribution of the Estate or the Insurance Proceeds. Just as a Will manages the distribution of net assets within the Testator's family, a Business Insurance Trust Agreement manages the distribution of Insurance Proceeds within a broader Business Family.

Business Insurance

Insurance that is used to fund the Purchase Price of the Life Insured's Equity in a Business and/or to fund Debt Reduction and other Key Person Needs.

Business Insurance Trust Agreement

A Business Succession Agreement that uses Trust Ownership of the Insurance Policies. Uses a Trustee and Directions to achieve the requirements of the Business and its Proprietors. Analogous to a personal Will and could be called a "Business Will". This term describes a Business Insurance Trust Agreement more so than a traditional Business Succession Agreement that deals only with the assets of the Life Insured.

Business Structure

The combination or composite of legal entities or vehicles which legally own and carry on the whole or any part of a Business (e.g., a sole trader, a partnership, a company, or a trust). A Business Structure sometimes consists of a number of different Business Entities, each of which holds different assets or carries on different business activities.

Business Succession

The change of ownership or control of a Business or an Equity in a Business upon the retirement or occurrence of an insured event with respect to a Proprietor.

Business Succession Agreement

A Proprietors Agreement that focuses primarily on the sale of the Proprietor's Equity in the Business upon their Retirement or the occurrence of an insured event. Can also document a Complete Succession Plan that addresses other Succession issues (such as the repayment of External Creditors and Loan Accounts).

Business Succession Plan

A documented commercial, financial, management and legal strategy designed to enable the orderly change of ownership or control of a Business (or part of the Equity in a Business) upon the retirement or occurrence of an insured event with respect to a Proprietor of the Business.

Business Will

An alternative term for a Business Succession Agreement. In reality, a Business Insurance Trust Agreement has more in common with a Will. See "Business Family Will".

Buy/Back Option (or Death Buy/Back Option)

If a Trauma or Critical Illness Benefit is paid to the Life Insured, it will normally reduce the Death Benefit by an equivalent amount. However, it is possible to obtain an option to reinstate the Death Benefit after the expiry of a Buy/Back Period (such as 12 months or two years) by resuming payment of the premium for the full Sum Insured. The reduction of the Death Benefit does not occur in the case of Stand-Alone Trauma Cover (where the Death and Trauma Benefits are not bundled in the same Policy.) See also Trauma Buy/Back Option.

Buy/Sell Agreement

A Business Succession Agreement that focuses primarily on the sale of the Life Insured's Equity in the Business upon the occurrence of an insured event in which case the Purchase Price will be funded by insurance proceeds.

Buy/Sell Insurance

Insurance designed to fund the Purchase Price of the Life Insured's Equity in a Business upon the occurrence of an insured event (see also Equity Insurance).

 

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Call Option

An option pursuant to which the Purchasers can "call" on the Vendors to sell the Equity.

Capital Gains Tax

Income tax payable with respect to the disposal of a CGT Asset (including the Equity in a Business and the rights under an Insurance Policy). There are limited exemptions with respect to Insurance Proceeds that depend on the nature of the Insured Event and the Ownership of the Policy. If the Policies are not correctly owned, there may be CGT with respect to both the Insurance Proceeds and the sale of the Equity. CGT can also be payable with respect to dealings with the Insurance Proceeds after they have been paid by the Insurance Company to the Policy Owner, if they are not structured and documented properly.

Complete Succession Agreement

A Business Succession Agreement that documents a Complete Succession Plan.

Complete Succession Plan

A Business Succession Plan that addresses both Retirement and Insurable Events, as well as any combination of Asset, Liability and Personal Needs.

Conditions Precedent

Conditions in a legal agreement that prevent a Contract of Sale of the Equity being created until the Conditions have been satisfied. They postpone the date of disposal of the Equity for CGT purposes to the date of satisfaction of the Conditions.

Conditions Subsequent

Conditions in a legal agreement that provide for a Contract of Sale of the Equity to cease or be terminated if the Conditions have been satisfied. Unlike Conditions Precedent, they do not postpone the date of disposal of the Equity for CGT purposes to the date of satisfaction of the Conditions.

Continuing Proprietor

A Proprietor of the Business other than the Life Insured who has suffered an Insured Event (such as Death, Total and Permanent Disablement or Trauma).

Crediting Provision

A provision in a Self-Ownership Business Succession Agreement that credits the Purchasers with the insurance proceeds received by the Life Insured (or their Estate) directly from the insurance company (instead of from the Purchasers). It avoids the risk that the Estate will require the Purchasers to pay the Purchase Price in addition to the insurance proceeds (i.e., the risk of "double dipping").

Cross-Ownership

The ownership of an insurance policy by a person or entity other than the Life Insured (usually the other Proprietors or the Business). See also Self-Ownership and Trust Ownership.

 

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Death

The cessation of life of the Life Insured or Proprietor of a Business.

Death Benefit

The insurance proceeds payable upon the death of the Life Insured. Relevant to the CGT liability.

Debt Reduction Cover

Insurance intended to repay an External Creditor (perhaps so that the Life Insured or their Estate can be released from any personal guarantees of the Business Debt) or a Loan Account.

Departure Event

An event that requires or results in the exit of a Proprietor of a Business from the ownership and/or control of the Business. (Also called an "Exit Event".)

Direction

A binding instruction by a Beneficiary to a Trustee as to how a Trust Asset (such as insurance proceeds) should be distributed.

Disability

An illness or injury that reduces the ability of the Life Insured or Proprietor of a Business to work or perform their duties.

Disability Benefit

The insurance proceeds payable upon the disability of the Life Insured. Relevant to the CGT liability.

Discretionary Beneficiary

A person or entity identified in a Trust Deed as a potential Beneficiary to whom the Trustee is entitled (but not obliged) to distribute Income or Capital of the Trust. A Discretionary Beneficiary is not regarded as a Beneficial Owner of any of the Trust Assets.

Discretionary Trust

A Trust where no Beneficiary has a Fixed Interest in any of the Trust Assets. Instead, the Trustee is entitled (but not obliged) to distribute Income or Capital of the Trust to any of the Discretionary Beneficiaries in such proportions as it sees fit. See Family Trust.

 

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Employee Buy Out Strategy

A Succession Planning Strategy pursuant to which insurance can be used to enable some or all of the Staff of the Business to acquire the Business for a Pre-agreed Purchase Price.

Equity

The interest of an owner in a Business or Business Entity. The Proprietor's Equity must be sold to the other Proprietors and their Related Parties in order to give them 100% control of the Business and its assets.

Equity Insurance

Insurance designed to fund the Purchase Price of the Life Insured's Equity in a Business upon the occurrence of an insured event (see also Buy/Sell Insurance).

Equity Loan

A Loan obtained by a Proprietor in order to purchase the Proprietor's Equity in the Business.

Estate

The assets and liabilities of a deceased person, usually held and distributed by an Executor in accordance with Directions contained in a Will.

Estate Equalisation

The use of Insurance to allow the distribution of assets equitably between a number of Beneficiaries, some of whom might receive an interest in a Property or Business, while others might receive equivalent cash funded by the Insurance Proceeds (by way of compensation for not receiving an interest in the Property or Business). Also relevant where a Death Benefit from a Superannuation Fund is distributed to Dependant Beneficiaries (in order to avoid tax), while other assets of the Estate are distributed to Non-Dependant Beneficiaries.

Executor

A person who is nominated in a Will to hold the deceased person's assets and liabilities on trust and deal with them in accordance with the directions in the Will.

Exit Event

An event that requires or results in the exit of a Proprietor of a Business from the ownership and/or control of the Business. (Also called a "Departure Event".)

External Creditor

A person or entity (other than a Proprietor of the Business or a Related Party) to whom the Business is indebted (i.e., there is a debt or other liability pursuant to which it owes the Creditor money). (See Loan Account.)

 

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Family Business

A Business in which the Beneficial Owners of the Business are one or more members of the same family (whether the Equity is held by the Proprietors in their own name or through an interposed entity such as a Company or Trust). See also Sole Proprietor and Multiple Proprietors.

Family Buy/Sell Strategy

The use of Buy/Sell Insurance to enable one child to purchase the Equity in the Family Business from the parents, so that the net Sale Proceeds can be distributed equitably between the children (including the child who purchased the Business).

Family Trust

A Discretionary Trust used for the members of a family.

Fixed Trust

A Trust where the Beneficiaries have a Fixed Interest in the Income and Capital of the Trust. The Trustee does not have any discretion with respect to the amount of any Beneficiary's Interest.

Franking Credit

Credit that a Shareholder obtains for Income Tax paid by a Company when the Shareholder calculates the Income tax payable with respect to Dividends paid by the Company. The Credit reduces the tax payable by the Shareholder with respect to the Dividend. No Franking Credit is available with respect to a Dividend, if the Company did not pay Income Tax with respect to the source of the income (e.g., because the Insurance Proceeds payable on a Death were exempt in the hands of the Company, because it was the "Original Beneficial Owner of the Policy). "You can get funds into a Company tax-free, but you can't get them out tax-free.".

"Friendly Rival" Strategy

A Succession Planning Strategy pursuant to which insurance can be used to enable another Business in the same industry or profession to acquire the Business for a Pre-agreed Purchase Price.

 

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Geared Premium Funding

A strategy which borrows the Premium for Insurance Cover held outside the Superannuation environment on the basis that the total Premium Loan will ultimately be repaid out of the Life Insured's benefits from the Superannuation Fund. This effectively allows the Premiums to be paid out of pre-tax dollars, while avoiding the tax and other disadvantages of Super Fund Ownership.

Grossing Up

Where there is an Income Tax or Capital Gains Tax liability with respect to the Insurance Proceeds, it is possible to increase or "gross up" the Sum Insured, so that the tax liability can be paid out of the Insurance Proceeds and the net Insurance Proceeds will be adequate to meet the actual financial need. This strategy obviously grosses up the Premium cost. Where the tax liability is a Capital Gains Tax liability with respect to Non-Death Cover, this liability (and the need to gross up) can be avoided by a Business Insurance Trust Agreement. Where the tax liability relates to Insurance Proceeds received by or distributed from a Superannuation Fund, the tax liability can be avoided by holding the cover outside the Superannuation environment.

Guarantee

A contractual obligation where a Proprietor or Related Party promise to honour the obligation of the Principal Debtor to repay a debt or liability to the Creditor, particularly if the Debtor defaults in repayment.

Guarantor

A Proprietor or Related Party who guarantees or promises to honour the obligation of the Principal Debtor to repay a debt or liability to the Creditor, particularly if the Debtor defaults in repayment. See Right of Contribution.

 

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Hedge and Wedge Strategy

A Business Succession Planning Strategy that uses insurance to hedge against the risk that the Purchasers might not be prepared (or able to afford) to pay the Purchase Price of your Equity, while pre-agreeing the Purchase Price so that the Owner of the Equity will receive a guaranteed minimum Purchase Price.

Hybrid Trust

A Trust where the Primary Beneficiaries have a Fixed Interest in the Income and Capital of the Trust. However, there is a discretion with respect to how the Fixed Interest is apportioned between Beneficiaries associated with each Primary Beneficiary.

 

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Insurable Event

An event that is capable of being insured under an Insurance Policy (such as Death, Total and Permanent Disability or Trauma).

Insurance Facility Agreement

The elements of a Business Insurance Trust Agreement that allow the apportionment of the total Sums Insured to be varied as the Life Insured's Needs change over time. The Life Insured might have the right total Sum Insured. All that changes is the "mix". An alternative to the need to change the Sums Insured under separate Policies on a review.

Insurance Policy

A contractual promise by an Insurance Company to pay the Sum Insured upon the occurrence of any of the Insured Events specified in the Policy with respect to the Life Insured. May be a composite of promises to pay Death Benefits and Non-Death Benefits.

Insurance Proceeds

The amount payable by the Insurance Company upon the occurrence of an Insured Event under an Insurance Policy.

Insured Event

An event described in an Insurance Policy, the occurrence of which will create an obligation to pay the Sum Insured to the Policy Owner.

 

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Key Person Capital Cover

Insurance designed to meet a Liability Need of a Business or its Proprietors (other than Key Person Revenue or Income Cover). The Need must be capital in nature (e.g., the reduction in capital value of the Business or the Equity in the Business).

Key Person Revenue (or Income) Cover

Insurance designed to compensate a Business against the loss of revenue or to fund the cost of a replacement employee.

 

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Legal Owner

The person or entity that is legally identified as the owner of an Asset, even if it is not also the Beneficial Owner of the Asset.

Liability Need

The Insurable Need of the Business with respect to the repayment of any External Creditors required to obtain a release of the Life Insured's personal guarantees, as well as the repayment of any Loan Account owing by the Business to the Life Insured (or vice versa) and any compensation for any loss of revenue or capital value by the Business.

Loan Account

A debt or other liability owing by the Business to a Proprietor (or a Related Party) (or vice versa).

 

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Management Buy Out Strategy

A Succession Planning Strategy pursuant to which insurance can be used to enable some or all of the Management Staff of the Business to acquire the Business for a Pre-agreed Purchase Price.

Market Value Substitution Rules

If a contract of sale provides for no consideration or inadequate consideration, the ATO may substitute its view of the market value of the asset and deem the Vendors to have sold (and the Purchasers to have purchased) the asset for that amount. This gives the Purchasers an appropriate Cost Base for CGT purposes, but also creates a CGT liability payable by the Vendors (even if they have not received the market value). The ATO applies this Rule in the case of Self-Ownership, where the Purchasers pay no Purchase Price, because the Insurance Company pays the Insurance Proceeds attributable to the Purchase Price directly to the Life Insured.

Multiple Policy Approach

The practice of insuring separate Business and Personal Needs on separate Policies, often with different Policy Owners.

Multiple Proprietors

A business structure in which there are two or more underlying Beneficial Owners of the Equity in the Business (whether the Equity is held by the Proprietor in their own name or through an interposed entity such as a Company or Trust). Usually refers to arms-length Proprietors (rather than spouses or life partners). May refer to joint ownership of the Business by the parents and their children (the "Second Generation". See also Family Business and Sole Proprietor.

 

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Non-Arm's Length Trustee

A Trustee that is personally or commercially related to any of the parties to the Business or the Agreement. As a result, there is a risk that the Trustee could breach any agreement or exercise any discretion or power in favour of one party to the disadvantage of others.

Non-Death Benefit

The insurance proceeds payable upon an insurable event other than the death of the Life Insured (e.g., Total and Permanent Disability, Trauma and Terminal Illness). Relevant to the CGT liability.

 

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One Page Succession Plan

A commercial strategy that identifies the Insurable Needs of a Life Insured and their Business on a One Page Risk Analysis Worksheet. The same process can be used to identify the issues required to develop a Retirement Strategy.

One Page, One Policy Strategy (or Succession Plan)

A commercial strategy that identifies the Insurable Needs of a Life Insured and their Business on a One Page Risk Analysis Worksheet and then allows the total Sum Insured required by the Life Insured and their Business to be insured on One Policy.

One Page, Two Policy Strategy (or Succession Plan)

A commercial strategy that identifies the Insurable Needs of a Life Insured and their Business on a One Page Risk Analysis Worksheet and then allows the total Sum Insured required by the Life Insured and their Business to be insured on Two Policies.

Original Beneficial Owner

The Beneficial Owner of a right or interest in a Policy at the time of its original acquisition.

Original Beneficial Ownership Agreement

An Agreement that provides that only the Life Insured will be treated as the Original Beneficial Owner of the Policy and no other proposed Recipients of any of the Insurance Proceeds will have any interest in the Policy or the Proceeds (used where the Cover is proposed in the name of the Lives Insured and assigned to the Trustee upon the issue of the Policies and execution of a Business Insurance Trust Agreement).

Outgoing Proprietor

The Life Insured who has suffered an Insured Event (such as Death, Total and Permanent Disablement or Trauma).

Own Occupation TPD

TPD Insurance Cover where the Life Insured may only receive the Insurance Proceeds if they are totally and permanently disabled from performing the duties of their own occupation (even though they might be able to perform the duties of another occupation).

 

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Partnership Agreement

A Proprietors Agreement between the Partners in a Partnership.

Personal Need

The Insurable Need of a Life Insured that represents the amount of capital required to fund living expenses and repay debts and liabilities (including any CGT on the sale of Equity) after allowance for any capital or income from the Equity, other investments, superannuation, asset sales and repayments of Loan Accounts.

Policy

A contractual promise by an Insurance Company to pay the Sum Insured upon the occurrence of any of the Insured Events specified in the Policy with respect to the Life Insured. May be a composite of promises to pay Death Benefits and Non-Death Benefits.

Policy Owner

The Legal Owner of the Policy as shown in the records of the Insurance Company.

Pre-agreed Purchase Price

The strategy of pre-agreeing the Purchase Price of a Proprietor's Equity in the Business Succession Agreement (rather than requiring it to be determined by valuation upon the occurrence of an Insured Event or the Retirement of the Proprietor).

Premium

The payment or consideration for the issue and renewal of an Insurance Policy.

Premium Loan

A loan taken out in order to fund a Geared Premium Funding Strategy.

Proprietor

The owner of an Interest or Equity in a Business. (In all IGS Business Succession Agreements, the Life Insured is described as the Proprietor and other owners are described as Related Parties.)

Proprietor's Equity

The Equity in the Business owned by a Life Insured and/or any Related Party of the Life Insured.

Proprietors Agreement

An Agreement that regulates the relationship between the Proprietors, as well as the relationship between the Proprietors and the Business (see Partnership Agreement and Shareholders Agreement). One Agreement can regulate a number of different Business Entities in the one overall business relationship.

Public Offer Super Fund

A Public Offer Super Fund is a Superannuation Fund that is defined as a Public Offer Superannuation Fund by section 18 of the Superannuation Industry (Supervision) Act 1993. They often provide insurance cover that is deemed to be in the superannuation environment, so that the premiums are effectively tax-deductible (although the Insurance Proceeds can be assessable in a number of circumstances).

Purchaser

A person or entity that is required to purchase another Life Insured's Equity upon the occurrence of an Insured Event. The Purchaser might be a Life Insured or a Related Party of the Life Insured that already owns some of the Proprietor's Equity associated with that Life Insured.

Put Option

An option pursuant to which the Vendors can "put" to or require the Purchasers to purchase the Equity.

Put and Call Options

A combination of Put and Call Options pursuant to which the Vendors or Purchasers can require one another to purchase or sell the Equity. Because it is likely that one or other will desire a sale to occur, it is tantamount to a binding contract of sale, except that it postpones the date of contract and date of disposal for CGT purposes to the date of exercise of the option.

 

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Recipient

A person or entity who is intended to receive part of the insurance proceeds, regardless of the identity of the Policy Owner or whether there are one or more intervening parties who might receive the insurance proceeds from the insurance company and distribute them to other intervening parties before they are ultimately paid to the Recipient (e.g., the intended Recipient in the case of Debt Reduction Cover is usually the External Creditor).

Related Party

A person or entity associated with a Life Insured who might own some of the Equity in the Business on their behalf or might be required to purchase another Life Insured's Equity upon the occurrence of an Insured Event.

Related Party Purchaser

A person or entity (other than the Life Insured) that is required to purchase another Life Insured's Equity upon the occurrence of an Insured Event.

Related Party Vendor

An Owner of the Equity (other than the Life Insured) who is required to sell it upon the occurrence of an Insured Event.

Retirement

The voluntary or involuntary departure of a Proprietor from a Business (other than in the case of an Insured Event).

Right of Contribution

The right of a person or entity that repays a debt on behalf of the actual Debtor to be reimbursed by the Debtor or any other guarantors.

 

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Second Generation

Any children of the parents who own or previously owned the Business and are now involved in the ownership or management of the Business.

Self-Ownership

The ownership of an insurance policy by the Life Insured.

Self-Ownership Buy/Sell Agreement

A Business Succession Agreement that uses Self-Ownership of the Insurance Policies. It must contain a Crediting Provision.

Shareholders Agreement

A Proprietors Agreement between the Shareholders in a Company.

Simple Succession Plan

A Succession Plan that focuses on a Buy/Sell Insurance strategy, rather than addressing a combination of Asset, Liability and Personal Needs.

Single Policy Strategy (or One Policy Strategy)

The ownership of all insurance cover required for a One Page Succession Plan with respect to the Life Insured on one Policy held by a Trustee. The Trustee can hold more than one policy on the terms of the Trust Agreement. The Agreement will simply aggregate the total Sums Insured and distribute them on the occurrence of an Insured Event (regardless of the sum insured under each separate Policy). The Trust Agreement operates as a flexible Insurance Facility Agreement.

Sole Proprietor

A business structure in which there is only one underlying Beneficial Owner of the Equity in the Business (whether the Equity is held by the Proprietor in their own name or through an interposed entity such as a Company or Trust). Can also be applied to situations where the Multiple Proprietors are spouses or life partners. See also Family Business and Multiple Proprietors.

Stand-Alone TPD or Trauma Cover

It is normal to "bundle" Death and Non-Death Benefits (such as TPD or Trauma) in the one Policy. However, normally, the payment of the TPD or Trauma Benefit will reduce the Death Benefit by an equivalent amount. The reduction of the Death Benefit does not occur if the different Benefits are contained on separate, "stand-alone" Policies.

Substitute Lender

The parties who will lend the Debt Reduction Insurance Proceeds to the Company or Business (so that it can repay an external Creditor (such as a Bank)) on the terms of a Loan Account established by a Business Insurance Trust Agreement. Usually the Continuing Proprietors who will collectively own 100% of the Company or Business.

Super Buy/Sell

The ownership of a Buy/Sell Insurance Policy (i.e., Insurance Cover attributable to the Sale Price of a Proprietor's Equity in a Business) in the name of a Superannuation Fund (so that a tax deduction may be obtained for the premium). Advisers and Clients should note the risk that the Fund might breach the "sole purpose test" as well as the other risks and disadvantages of Super Fund Ownership discussed on this web site. See also Geared Premium Funding.

Super Fund Ownership

The ownership of any Insurance Policy (e.g., Insurance Cover for Personal or Buy/Sell Needs) in the name of a Superannuation Fund (so that a tax deduction may be obtained for the premium). Advisers and Clients should note the risks and disadvantages of Super Fund Ownership discussed on this web site. See also Geared Premium Funding.

 

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Terminal Illness Benefit

A benefit that is payable upon the diagnosis of an illness which will result in the death of the Life Insured within 12 months, regardless of any treatment they might receive.

Testamentary Trust

A Trust that is created by the "last Will and Testament" of a person. It is designed to avoid the payment of the whole of the Estate to one Beneficiary (such as the Spouse), which would result in all income from the investment of the Estate being taxed at the Spouse's marginal rates. A Testamentary Trust allows distributions to multiple Beneficiaries, which can achieve lower tax rates with respect to the total income of the Testamentary Trust.

Total and Permanent Disablement or Disability Insurance (TPD)

Insurance Cover that is only payable if the Life Insured is both totally and permanently disabled from working for a period defined in the Policy (usually at least six months). See Any Occupation and Own Occupation TPD.

Trauma

A critical medical condition specified in a Trauma Insurance Policy. A Policy normally lists a number of specific medical conditions that will result in the payment of a Trauma Benefit. (Also called a Trauma Condition or a Trauma Event or a Critical Illness or a Critical Condition.)

Trauma Benefit

The insurance proceeds payable upon the occurrence of a Trauma Condition with respect to the Life Insured. Relevant to the CGT liability.

Trauma Insurance

Insurance Cover that is payable upon the diagnosis of a critical medical condition specified in the Policy.

Trauma Buy/Back Option

If a Trauma or Critical Illness Benefit is paid to the Life Insured, it will normally reduce the Death Benefit by an equivalent amount. However, it is possible to obtain an option to reinstate the Death Benefit after the expiry of a Buy/Back Period (such as 12 months or two years) by resuming payment of the premium for the full Sum Insured. It is now possible to "buy/back" the Trauma Cover after a Trauma claim (although the Benefit will normally exclude cover for the type of event that gave rise to the original claim).

Trust

A legal structure that splits the ownership of an asset into Legal (or Nominal) Ownership and Beneficial Ownership. The Trustee will be the Legal (or Nominal) Owner of the Trust Assets. The Beneficiaries will usually be the Beneficial Owners of the Trust Assets (except in the case of Discretionary Trusts). The Trustee must hold and manage the Trust Assets for the commercial benefit of the Beneficiaries.

Trust Agreement (or Deed)

A legal document that determines the rights and obligations of the Trustee and the Beneficiaries.

Trustee

The Legal or Nominal Owner of a Trust Asset. The Trustee is subject to a fiduciary duty to hold and manage the Trust Assets for the commercial benefit of the Beneficiaries.

Trust Ownership

The ownership of an insurance policy by a person or entity in the capacity of a Trustee upon the terms of a Trust Agreement. The Trustee will be the Legal Owner of the Policy. However, the Beneficial Owner will be the Beneficiary, usually the Life Insured (in order to obtain the CGT exemption for Non-Death Benefits).

 

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Unit Trust

A Fixed Trust where the ownership of the Trust Assets has been "unitised" or converted into a transferable Unit, which represents a proportionate share of the Income and Capital of the Trust. The transfer of a Unit represents a transfer of a proportionate amount of the Capital of the Trust.

 

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Vendor

An Owner of the Equity who is required to sell it upon the occurrence of an Insured Event. The Vendor might be the Life Insured or a Related Party of the Life Insured.

Vendor Finance

The payment of any part of the Pre-Agreed Purchase Price after the Date of Completion of the sale of the Equity. The Vendor transfers ownership of the Equity on the basis that the shortfall will be paid in one or more subsequent instalments. Vendor Finance might be necessary if the Purchasers are unable or unwilling to borrow the whole of the Purchase Price desired by the Vendor, so that it can be paid at the same time as the initial Instalment (potentially funded by Insurance Proceeds).

 

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Will

A legal document that deals with the assets and liabilities of a person upon their death. Sets out the terms upon which an Executor must satisfy any liabilities and distribute any net assets to Beneficiaries nominated in the Will. A Will is effectively a Trust with Directions to the Executor/Trustee with respect to the distribution of the Estate.

Copyright: Ian Gray Solicitor

 

 

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