Stock Redemption Agreement Funded with Life Insurance

When the average person thinks of a stock, they assume the stock can be sold with the click of a mouse. When we refer to a Stock Redemption Agreement, we are referring to a different type of stock entirely. A stock redemption agreement funded by life insurance is applied to a company structured with ‘closely held stock’ which does not have a readily available market for buying and selling shares.

Stock ownership of such companies is, for the most part, illiquid. This lack of ‘ready market’ means heirs cannot sell the closely held corporate stock inherited if the shareholder dies. If a shareholder passes without a stock redemption plan in place, the estate or family of the shareholder will receive the stock, which may not be in the best interest of the business, nor the family or estate of the deceased shareholder.

Many times, other shareholders would prefer the control to be maintained by the company and the family estate that inherits the shares of their family member would probably rather have the cash, for the most part.

With a redemption agreement funded by life insurance, the stock company and shareholders can create a ready market for deceased stockholder interest to be purchased from the deceased partners estate, simply and effectively!

A stock redemption buy sell arrangement is:
  • A contract agreed to by the corporation and shareholders that requires the corporation to purchase the stock ownership interest of a shareholder after specific triggering events (i.e. death of the owner).
  • An arrangement that, when funded with life insurance, helps ensure that cash will be available to help facilitate the buyout.
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If you relate to these statements, establishing a stock redemption buy-sell arrangement funded with life insurance may be right for you:
  • You have spent many long hours working in and creating value in your business, and it is either one of the major assets or the major asset in your estate.
  • You would like to create a ready market for the sale of your shares at your death. You want to see that the business remains in the hands of just the surviving shareholders.
  • You see the need to establish an estate value for your business interest in order to reduce the potential for IRS disputes.
  • You want to be certain funds will be available to help with the buyout of a deceased or departing shareholder’s interest.

I have known the proprietor of East Coast Financial for over 20 years and from the day I met him, to shortly after when he managed my money, I knew he and his organization is one I could trust.

– Robert Leaman | Retired | Former Owner Compressed Gas Solutions

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Benefits to The Heirs or The Inheritors of The Deceased Shareholders Estate

The stock redemption agreement provides a ‘ready market’ for the sale of business interests after the death of an owner. If the agreement is properly drafted, implemented and maintained, this arrangement helps establish the business value for estate tax purposes. If properly funded with insurance, it ensures that cash to help pay estate taxes and meet family needs will be available. Furthermore, the shareholder’s heirs are completely relieved from further corporate responsibilities…no one wants to deal with those if they don’t have too. Again, where life insurance is used to fund the buyout, the inheritors or heirs of the deceased shareholder receive cash virtually immediately. This avoids illiquidity delays in receiving cash late or accepting lost value to sell things faster. Not to mention, the family is no longer reliant on the corporation for their financial wellbeing.

Benefits to The Corporation and In Turn, The Surviving Shareholders

With a life insurance funded agreement, the corporation receives life insurance proceeds to finance the buyout of the deceased shareholder at the time it is needed. Additionally, the corporation will continue uninterrupted with the surviving shareholders as owners. One important note to remember when deciding on a funding tool for the stock redemption buy sell agreement, is that using permanent as opposed to term insurance carries additional benefits. Permanent insurance cash is carried as an asset to the company and can provide needed cash to help meet contractual obligations set forth by the buy sell agreement, minimizing the impact on working capital and cash flow (leveraging power in action). To contrast a cross purchase buy sell agreement, a stock redemption agreement allows the corporation to purchase just one policy on each owner. Another very crucial point is that creditors, employees and supplies feel much more comfortable when such an agreement is in place.

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Stock Redemption Agreement Funded with Life Insurance
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