Corporation

How a Stock Redemption Buy-Sell Plan works when a shareholder dies in a Corporation

3. At a shareholder's death, the corporation receives the income-tax-free death benefit from the life insurance policy it owns on the deceased shareholder. 4. The corporation uses the proceeds of the life insurance to buy the stock from the deceased shareholder's estate for the purchase price agreed upon in the buy-sell agreement. 5. After settling the estate, the executor distributes the balance of the estate to the deceased shareholder's heirs.

How a Cross Purchase Buy-Sell Plan works for a Corporation at the death of Shareholder

3. At a shareholder's death, each surviving shareholder receives the income-tax-free death benefit from the life insurance policy owned on the deceased shareholder. 4. The surviving shareholder(s) then use the proceeds of the life insurance to buy the stock from the deceased shareholder's estate for the purchase price agreed upon in the buy-sell agreement. 5. After settling the estate, the executor distributes the balance of the estate to the deceased shareholder's heirs.

When a shareholder dies, the heirs may be faced with a number of problems, including:

- Need for Income - Estate Liquidity - Market

An Insured Cross Purchase Buy-Sell Plan can accomplish the following for a Corporation

- The surviving shareholders avoid the business problems associated with active or inactive heirs, while the heirs receive cash instead of the generally poor investment potential of closely-held stock. - The surviving shareholders are committed to buy and the deceased shareholder's estate is committed to sell the business interest for a price that is agreed upon in advance. - The funds to complete the sale are available exactly when needed at a shareholder's death. - The value of the business interest may be fixed for federal estate tax purposes. - The deceased shareholder's heirs are guaranteed a full and fair cash price for the business. - Cash becomes available to settle the deceased shareholder's estate promptly and to replace family income.

Stock Redemption Tax Results: Corporation

- While life insurance proceeds received by the corporation at a shareholder's death generally are not subject to federal income tax, they may be subject to the corporate alternative minimum tax. - While the surviving shareholders receive an increased ownership share of the corporation, there is no increase in their tax basis (Like an entity Purchase)

Then there is the issue of the deceased shareholder's heirs, who now own an interest in the business. In the absence of advance planning, the heirs:

1. can become active in the business, even through they may be unqualified; 2. they can remain inactive but look to the business for income; or 3. they can sell their stock...to anyone with the purchase price.

Problems When the Heirs Become Active Shareholders

Heirs who were not active in the corporation prior to a shareholder's death may not be qualified to take an active role in managing the business. They will likely contribute very little, but will expect their share of the profits. This situation can lead to serious problems, depending on the heirs' ownership interest: -

Difference Between a Cross Purchase and Stock Redemption Plans for Corporations?

In a cross purchase buy sell, the shareholders commit to buy, and in a Stock Redemptions, the corporations buys

What Happens When a Shareholder Dies?

The deceased shareholder's interest in the corporation may pass to the shareholder's heirs or beneficiaries. The corporation itself may still be legally intact and able to carry on its business affairs. - There may be no legal effect on the life of the business

A Corporate Insured Cross Purchase Buy-Sell Plan

While the death of a shareholder may have no legal effect on a closely-held corporation, without advance planning there are some very real practical consequences that can have an adverse impact on the ability of the corporation to continue as a viable business.

Problems When the Heirs Become Inactive Shareholders

While the heirs of a deceased shareholder may not be active in actually running the corporation, this does not prevent them from demanding a voice in corporate policy. Inactive heirs can create a variety of problems, depending on their ownership interest: