Buy-Sell Insurance & Agreement Funding · Ottawa
A co-owner’s death can leave the business needing to buy their shares and the family waiting for payment. Life insurance can help fund that purchase under a properly drafted agreement.
From agreement to transfer
Your lawyer establishes the triggers, buyer, seller, valuation method and payment terms. Insurance does not create a purchase obligation.
The owner, insured person and beneficiary must match the intended transaction. An approved death claim pays the named beneficiary, subject to the contract.
The corporation or surviving shareholders use the funds as agreed, the estate receives payment and the shares are purchased or redeemed.
Choose a structure with your advisors
A hybrid arrangement may also be appropriate. Your lawyer and accountant should assess the agreement, tax position, creditor exposure and succession goals before a structure is chosen.
The coverage should be connected to a supportable business valuation and the purchase obligation established by the agreement.
Coverage can differ between owners. Account for growth, each ownership percentage and amounts that may not be insurable.
A qualified business valuator, accountant and lawyer should confirm the valuation and transaction structure.
If an owner cannot qualify for sufficient coverage, the agreement needs another funding source: reserves, borrowing, instalments, a promissory note or vendor financing. Set payment terms the business can sustain.
Life insurance does not fund every exit. Address disability, illness, retirement, voluntary departure, termination, bankruptcy, marital breakdown, licence loss, disputes and outside offers in the legal agreement.
Questions before you decide
A buy-sell arrangement may be included within a shareholders’ agreement or documented separately. Your lawyer should determine the appropriate legal structure.
Life insurance premiums are generally not deductible. Limited exceptions may apply when a policy is assigned as collateral for a qualifying business loan. The company’s accountant should confirm the treatment.
Life insurance death benefits are generally received tax-free by the named beneficiary. When a private corporation receives the proceeds, the policy’s adjusted cost basis affects the amount that may be credited to its capital dividend account.
Possibly, but using one benefit for two purposes can create a funding shortfall. Each need should be calculated separately before relying on one policy.
Review with Centerpointe
We’ll compare the intended purchase with your valuation, policies and available funds, then coordinate with your lawyer and accountant. Review the arrangement when business value, shareholders, debt, health or succession objectives change. Sole proprietors may need succession and estate-liquidity planning even though there is no co-owner buyout.
Buy-Sell Agreement Funding guidance in Ottawa and neighbouring Eastern Ontario communities.
This page provides general educational information and does not constitute insurance, legal, accounting, valuation, investment or tax advice.
A qualified lawyer must draft or review any buy-sell, shareholders’, partnership or ownership agreement. An accountant and, where appropriate, a qualified business valuator should review the tax treatment and valuation provisions.
Insurance does not create a purchase obligation and may not cover the entire purchase price. Benefits are payable only when the policy’s contractual claim requirements are satisfied.
Life insurance is subject to eligibility, underwriting, exclusions, limitations and approval by the issuing insurer. Corporate and personal tax outcomes depend on policy ownership, beneficiary designation, adjusted cost basis, transaction structure and legislation in effect at the relevant time.
