Corporate Owned Life Insurance and Dependent Relief Claims

Updated, Jan. 2021

A start-up business frequently requires money to get ideas implemented, business plans executed and day to day expenses covered. It seeks out a lender. The lender may be comfortable with providing a loan as long as the key people in the business are around to run and build the business. What happens if a key person passes away? Business operations may suffer or may no longer remain viable. The lender may want the debt retired, yet there may not be funds to make that happen.

Professional advisors often recommend life insurance covering the key person as a way of satisfying any lender concerns and of repaying loans. The insurance policy is owned by the business with the company or lender named as beneficiary or the policy is held as collateral against any outstanding amount at death.

What happens when the initial need for the life insurance changes? What if the policy is now needed for personal estate planning purposes? The policy may be treated as if it were part of a personal estate plan, with benefits to be paid out to individuals, not the company, even though the company still owns and pays for the coverage. If claims against the personal estate crop up, who has rights to the policy proceeds? Let’s consider the case of the Goodis Estate.(1)

Two life insurance policies were issued by London Life in the amount of $750,000 each on the life of Gerald Goodis. The policies were owned and funded by a holding company. The holding company was jointly owned by Gerald and his second wife, Lynn. Its main purpose was to lend money to finance an operating company run and owned by Gerald. Lynn had loaned the holding company approximately $1.8 Million. One of the prime purposes of the life insurance was to cover the loans. A second purpose was to fund a buy sell agreement. Two identical policies were also issued on the life of Lynn Goodis, owned by the holding company.

The operating company paid the premiums on the policies until it became insolvent. Then the holding company paid the premiums. The holding company changed the beneficiary on both policies covering Gerald to Lynn Goodis personally in 1995. The holding company changed the beneficiary on one of those policies four years later to provide $25,000 each to Gerald’s two minor sons from a previous marriage, with the balance still going to Lynn. Gerald had been providing court ordered support for his two sons. The beneficiary on the policies on Lynn’s life was changed to Gerald Goodis.

Gerald died suddenly in 2000. He was essentially insolvent. The guardian for the two sons sought support, claiming that the two corporately owned life insurance policies covering Gerald were effectively part of Gerald’s estate. Lynn Goodis claimed that she was entitled to the proceeds as designated in the two policies.

The matter went to court for a decision. A key question was; “who effectively ‘owned’ the two life insurance policies? Learn more about this in my next article .

? 2018 by peter a wouters

? 2020 by peter a wouters

(1) GOODIS ESTATE, RE, [2002] O.T.C. 971 (SC); GOODIS ESTATE, RE, (2003) 175 O.A.C. 271 (DC)

Related articles

Actual vs. effective owner of corporately owned life insurance

Corporate owned life insurance and death after share sale

The material in this article is current as of the date published. This material is presented for informational purposes only, and is not a legal, tax or investment opinion. The provision of the information contained herein and any oral or written communication regarding the same should not nor is intended to be construed as such. Interested persons should seek and retain independent professional advice before acting or foregoing action in relation to any of the matters mentioned herein reflected as of the date published or updated.?