Death & The Shareholders Agreement

by Dean Paley on February 6, 2013

The shareholders agreement is an important part of your business. It addresses many common situation business owners may face when they have partners in the business.

Your shareholders agreement is also part of your succession plan and deals with what happens on your death.

If you have a shareholders agreement, does it provide enough flexibility for your executor and the remaining shareholders to structure the buyout to minimize taxes and provide positive cash flow to your estate?

life-insuranceThe tax-free nature of life insurance payments may help. Here’s how:

Life insurance proceeds received by a corporation or individual is normally received tax free.  In a corporation, the proceeds are credited to a notional account known as the the capital dividend account.

An amount equal to the proceeds less the adjusted cost basis of the policy can is added to this account and in turn can be paid to the shareholders tax-free as a capital dividend.

This tax-free dividend can be used by the surviving shareholders to purchase your shares and potentially preserve $750,000 capital gains exemption.

On the other hand, the corporation may redeem your shares and your estate receive a tax-free dividend to the extent of the balance in the company’s capital dividend account.

Without life insurance, the tax-free transfer of ownership cannot occur and there will be either a capital gain or a deemed dividend reported.

It is important to structure the agreement properly and have the proper insurance in place to minimize the tax bill and provide more value to your family.

Is Your Succession Plan Tax Efficient?

Call us today at (289) 288-1206 to email us to arrange your appointment.

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