The Structure of Buy Sell Agreement Life Insurance
When life insurance is utilized for funding a buy sell agreement following the death of a shareholder, the insurance policy must have a death benefit that is equal in value to the number of shares held by the deceased shareholder.
There are two buy sell agreement considerations that may determine how the agreement is structured:
- The shares of the deceased shareholder can be purchased by the surviving shareholders
In this situation, the buy sell agreement may be funded either by using;
a. Criss-Cross Purchase – using shareholder-owned insurance
b. Promissory Note – using corporation-owned insurance
- The shares of the deceased shareholder can be redeemed and purchased by the corporation;
c. Corporate Redemption – funded by corporation-owned insurance
It is also possible to use a combination of the “Promissory Note” and the “Corporate Redemption” methods (often called the “Hybrid Method“) for buy sell agreement structuring.
In this case, the shareholders agreement contemplates that:
- The corporation will purchase some or all of the deceased’s shares
- The surviving shareholders will purchase some or all of the deceased’s shares
In this situation, the obligation is funded with insurance owned by the corporation.
Benefit Strategies can help you with buy sell agreement discussion items and how to properly structure your agreement.
To learn more, or for answers to your buy sell agreement questions, please contact our Benefit Strategies experts.