What happens if your partner dies? It sounds like a morbid question we rather not think about, but it is something that every partner (or quasi partner which is the reality
of directors in many law corporations) should consider carefully. This is really a bigger concern for the smaller partnerships (or quasi-partnerships) which form the majority of law firms in Singapore.
In a partnership, each partner has joint and several liability for the partnership. In a law corporation, this may not be so, but effectively, the same result may arise due to personal guarantees given by directors on behalf of
the law corporation.
When a partner dies, the partnership is dissolved. There are two options for the surviving partner(s): liquidate or reorganise into a new practice. If the firm is to liquidate, the surviving partner(s) may find it difficult to
start their career again. They may also be forced to come up with additional money to pay off outstanding liabilities.
Most surviving partners would be interested in continuing the practice of their partnership after the death of one of their partners. In order to do that, they need to acquire the interest of the deceased partner.
The other side of this coin concerns the price paid for the deceased partner’s interest. Each partner will want to see that his or her family or estate receives a fair market value for their interest in the firm. This objective
must be covered within the partnership deed (or shareholders agreement), setting out what is commonly referred to as the ‘buy-sell agreement’. The buy-sell agreement makes binding on the partners certain commitments, particularly
the formula on which the value of the deceased partner’s interest is to be calculated. In a professional partnership, income is derived from knowledge and skill, and less (if anything), from the tangible assets such as furnishings
and equipment. It follows, therefore, that professional partnerships place a very high value on goodwill, which is intangible, as opposed to net tangible assets. The formula to be used for calculating the value of the goodwill of
the firm following a partner’s death should be agreed and specified in the buy-sell agreement to avoid disputes with the estate later.
As a practical matter, a buy-sell agreement is only paper without the cash to back up the purchase on the terms agreed. The best way to ensure that the money needed will be available to buy the share of a partner should death
occur, is of course by taking out life insurance on the life of each partner for the amount necessary to buy his or her share of the partnership. One way to arrange this is through a ‘Cross-Purchase’ where, if there are three
partners, A, B and C, then the policy on A’s life is owned by B and C, while the policy on B’s life is owned by A and C and the policy on C’s life is owned by A and B.
Life insurance is probably the best option because the alternatives are usually less viable. Let us consider two:
Borrowing and saving should be considered if one or more partners are uninsurable.
Although I have addressed death, the prospect of long-term disability of a partner could result in much the same situation as death of a partner. In fact, the impact on the partner and his family with the attendant need to fund
the medical cost, could be worse. Therefore, there should also be a buy-out arrangement in the event of a long-term or permanent disability. In this instance, there has to be an agreement on the definition of ‘disability’ and the
waiting period before the disability provisions of the agreement ‘kick in’. It is therefore useful for insurance arrangements to include disability and critical illness cover. The availability of insurance also provides for the
building up of some portion of a partner’s retirement fund.
It is useful to get the professional advice of a competent and experienced financial adviser to assist in deciding on the appropriate level of cover required.
Stanley Jeremiah
Goodwins Law Corporation