PROTECTING THE FUTURE OF YOUR BUSINESS
Understanding Buy/Sell Insurance
When a business has multiple owners or partners, you can use life or disability insurance to fund the buy sell agreement when something happens to one of those partners, rather than using personal funds or business assets. This insurance policy is then used to complete a buyout and provide the families of each partner or co-owner a secure source of funds for the value of their interest.
A buy/sell agreement can provide a business owner a plan and the protection they would need to continue in the event of the death of a shareholder.
The longevity of a business should be a core focus of any business owners financial plan. Funding a buy/sell agreement with insurance is one of the most cost and tax efficient ways to do so.
What you Need to Know
There are three ways to implement an insurance funded buy/sell agreement in a company:
In this arrangement, there is an agreement that the shareholders will buy out each other’s shares in the event of death. The shareholders purchase life insurance on one another and make each other the beneficiaries. In the event of a shareholder’s death the remaining shareholders would receive the life insurance benefit and be required to purchase the deceased’s shares, at an agreed upon valuation.
Promissory Note Method
This requires that the operating company purchase policies on all of its shareholders. Any life insurance benefits would be paid directly to the corporation and then subsequently divided amongst the remaining shareholders in the form of a Capital Dividend. As per the promissory note, the shareholders would then purchase the deceased’s shares.
Corporate Redemption Method
This arrangement obligates the corporation to repurchase the shares of a deceased shareholder. The corporation owns the policy and becomes the beneficiary. Upon the death of a shareholder, the corporation uses the life insurance proceeds to fund the redemption of the shares.
The Bottom Line
Using insurance is often the most cost efficient and effective way to fund a buy/sell agreement. Talking to a tax specialist and working with an insurance advisor can give you the guidance you will need to make the best decision for your company.
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