Buy / Sell Agreements on the Death of a Shareholder

In a recent blog post I outlined the benefits of dual wills for business owners as a means of providing a tax efficient manner of transferring the value of a business interest to his or her beneficiaries.  However, this is only of value if there is something to be transferred to the beneficiaries, in other words, ensuring that a business owner’s estate will receive money for his or her share in the business is equally as important.  This can be achieved with careful planning through a shareholders agreement.  The first step in the process is to have a buy/sell provision in the shareholders’ agreement specifying that, in the event of the death of a shareholder, the remaining shareholders will purchase the deceased’s shares (with the added benefit that the remaining shareholders do not risk co-owning the business with an undesired third party).

Though the buy-out on death is in place, there is no guarantee that the remaining shareholders will have the required funds to purchase the deceased’s shares.  To avoid this problem, the shareholders agreement is drafted in such a way that allows the business to purchase life insurance on its shareholders.  In brief, the life insurance proceeds are then used to fund the buy-out of the deceased shareholder.  Careful attention needs to be made when implementing this type of planning, and working closely with an insurance broker and legal counsel will ensure these planning steps are done properly.

André Munroe