According to Geoff Thompson, a cost-effective and economical method of providing the cash essential to purchase a deceased shareholder’s business interest is a stock redemption buy-sell plan. An insured stock redemption buy-sell plan words for a corporation by a stock redemption buy-sell agreement paid for with nondeductible life insurance premiums.The Corporation, Shareholders, and Insurance Company
First, the corporation and shareholders enter into an agreement where the corporation agrees to buy a deceased shareholder’s stock and the deceased shareholder’s executor is directed to sell the stock to the corporation for an agreed-upon price under a stock redemption buy-sell agreement. This protects not only the corporation, but the individual shareholders and the deceased shareholder’s family. With a pre-set price, all parties involved can plan for and know exactly how much money will be needed if a shareholder dies.
Next, the corporation is the owner of an insurance policy on each shareholder’s life. The amount of the policy differs based on the amount approximately equal to each shareholder’s vested interest in the business. The corporation is also responsible for payment of the nondeductible premiums on the insurance policies. The individual shareholders are not listed as the owner or beneficiary on the policy. This would create a delay in payment due to the insurance policy being tied up in the probate process if tied to the deceased shareholder’s estate.
Upon the death of the shareholder, the corporation obtains the income-tax-free death payment from the life insurance policy it owns on the departed shareholder. Then, the corporation uses the proceeds of the life insurance policy to purchase the stock from the deceased shareholder’s estate for the purchase price that was agreed upon in advance and listed in the buy-sell agreement. Finally, after resolving the estate, the executor dispenses the balance of the estate to the deceased shareholder’s heirs.Other Features of an Insured Stock Redemption Buy-Sell Plan
An insured stock redemption buy-sell plan can serve as a vital source of funding. It can also provide a number of other features, including:
With the many different nuisances involved in a corporate insurance stock redemption buy-sell plan, a financial advisor should be consulted. With the proper plan in place, all parties involved can have a seamless transition period.
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