The shareholders enter into a binding
agreement with the corporation for the purchase and sale of their respective interests in the corporation.
This agreement obligates the corporation to buy, and the departing shareholder to sell, a shareholder's
shares at an agreed upon or determinable price.
The corporation purchases a life insurance
policy on the life of each shareholder with a death benefit equal to the value of each
shareholder's respective interest. The corporation is the owner and beneficiary of the policies.
Upon a shareholder's death, the
corporation receives life insurance proceeds with which it purchases the decedent's stock.
At the shareholder's death, the
shareholder's stock becomes part of the shareholder's estate. The estate then sells that stock
to the corporation in return for cash generated by the corporation's life insurance policy.
The surviving shareholders have no
purchase obligation under the redemption agreement. Nevertheless, the redemption will give the
survivors an increase in their proportionate share of the outstanding stock.
A redemption agreement provides that the corporation will purchase the interest
of a departing shareholder upon the occurance of a triggering event. The shareholders enter into a binding
agreement with the corporation for the purchase of the shareholders' business interests. This agreement
obligates the shareholders and their estates to sell, and the corporation to buy, the shares of a departing
shareholder at an agreed-upon o determinable price. In the redemption agreement, only the corporation is
obligated to purchase shares.
The corporation obtains life insurance on each shareholder's life equal to the
value of that shareholder's interest in the corporation, naming itself both owner and beneficiary of the
policies. Corporate premium payments are non-deductible expenses. Upon a shareholder's death, the corporation
receives the policy proceeds generally income tax-free. The shareholder's estate then sells, pursuant to the
buy-sell agreement, the decendent-shareholder's entire stock interest to the corporation in return for cash
generated by the life insurance policy.
Simplicity. The stock redemption is uncomplicated and simple to effectuate.
One Life Insurance Policy Per Shareholder. The plan requires only one life insurance
policy for each shareholder.
Corporate Premiums. The corporation pays the policy premiums, thereby imposing no
direct burden on the shareholders.
Insurance as Asset. The cash value of life insurance policies are carried as assets
on the corporation's balance sheet without concerns of excess accumulated earnings, assuming the cash
values do not exceed the reasonable needs of the business.
Access to Cash Value. At the termination of the buy-sell agreement, the corporation
may access cash values in policies for other purposes, such as to fund deferred compensation obligations.
No Step-Up in Basis. Depending on the corporate structure, the surviving shareholder's
basis in the corporation may remain the same, although the value of their business interests increases.
Corporate Creditors. Corporate creditors can make claims against cash values of
corporate owned life insurance, possibly depleting buy-sell funding.
Alternative Minimum Tax. Life insurance cash values and death benefits may result
in corporate alternative minimum tax.
Tax-Bracket Leveraging. Nondeductible premium payments are more costly if the
corporation is in a higher tax bracket than the shareholders.
The Business Planning Group
3186 Eaglecrest Lane, Clinton WA 98236
Phone: 206-255-5700 Fax: 206-260-2721
At The Business Planning Group, Inc.™ (BPG) our focus is to provide our clients with strategic,
knowledge-based consulting and advice. At times, we may also assist our clients with securities-related services.
However, these services may only be provided to individuals residing in the states in which we are registered or
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