Buy Sell Agreements Funded By Life Insurance

The content of this post may appear a bit long, but if you are a business owner/partner it will be beneficial to your business.

I wanted to bring to your attention how I at Cooperators can help business owners and partners like you in our business community to protect your business interest and your dependents from unforeseen events that could lead to financial loss. One of the best ways to mitigate these risks is by creating a Buy Sell Agreement that’s funded with the purchase of Life Insurance. Many businesses are unaware of the effectiveness of this valuable approach. A recent e-blast survey shows an alarming 52% of business owners do not have any form of succession plan in place, (imagine working that hard to build something only for it to be worth nothing if, you became ill, disabled or die, and this is the reason why I have reached out to you to arrange a meeting to further explore your options.

The Importance of Buy Sell Agreements for Businesses

A Buy Sell Agreement funded by Life insurance is not an option but a necessity for a business owner such as yourself and your partners to have a proper succession plan.

What do you think would happen to your business if something happened to one of your partners?

One of the following scenarios is likely:

1. Your business could liquidate and pay the heirs their fair share.

2. The heirs could sell their shares to a third party.

3. The heirs could join the business as owners.

4. The business could pay the heirs their share and continue operating.

The first three options may not be the most appealing. The best way to handle this situation is for the business to pay the heirs their fair share; a Buy Sell Agreement can do this.

What is a Buy Sell Agreement?

A Buy Sell Agreement is a prearranged sale of the business for circumstances such as disability, retirement, and death. It is the most effective way to transfer ownership and can ensure that heirs get fair market value for their share of the business while maintaining business continuity.

How does it Work?

Let's suppose Bob, Earl and Dana are equal partners in Fab Corp., a technology business. Their lawyer recommended a Buy Sell Agreement using life insurance policies, to fund the agreement.

The most common type of agreement is the corporate criss-cross method, where the company buys life insurance policies (and pays the premiums) on the three partners, making Fab Corp. the owner and beneficiary on all the policies.

Unexpectedly Bob passes away. The tax-free life proceeds are paid to Fab Corp. The amount above the adjusted cost base flows through to a Capital Dividend Account. Earl and Dana issue a promissory note to Bob's heirs to purchase Bob's shares from the estate. Then Earl and Dana are issued a dividend to retire the promissory note.

Key Ingredients of a Buy Sell

The agreement should include the following:

? An obligation (not an option) on the surviving partners/shareholders to buy and on the estate to sell.

? A clear formula for establishing the purchase price as the fair market value of the business interest, updated regularly.

? A commitment to fund the agreement with life insurance.

? Drafted by a lawyer.

Structuring the Life Policy

In structuring the insurance funding of a Buy-Sell Agreement, significant income tax issues will result from the ownership and beneficiary designation choices.

A Canadian Controlled Private Corporation (CCPC) may be eligible for a small business deduction that reduces the effective rate of tax to approximately 23% on the first $300,000 of income. There can be a significant tax saving by designating the corporation as the owner and the beneficiary of the policies. The premiums will not be deductible, but the saving comes in the form of the spread between the marginal rates.

For more information on setting up your Buy Sell Agreement we are inviting you to meet with us at our office, at your place of business or virtually.

If you are a sole business owner, we would encourage you to reach out to me to talk about setting up you personal Life Insurance Plan.

[email protected], (905)347-5612