A stock redemption agreement is a contract between a corporation and its shareholders that allows the corporation to buy back shares of its own stock from a shareholder in the event of death, disability, retirement, or other triggering events. While several methods exist for funding stock redemption agreements, life insurance is one of the most common methods.
A life insurance-funded stock redemption agreement provides a tax-efficient way for a corporation to fund the purchase of shares from a deceased shareholder`s estate. The corporation purchases life insurance policies on the life of each shareholder, with the corporation as the beneficiary. In the event of a shareholder`s death, the corporation receives the death benefit proceeds from the life insurance policy and uses the proceeds to buy back the deceased shareholder`s shares from their estate.
There are several benefits to using a life insurance-funded stock redemption agreement. Firstly, it eliminates the need for the corporation to accumulate cash or other assets to fund the purchase of shares from a deceased shareholder`s estate. Secondly, it provides liquidity to the deceased shareholder`s estate, which can be beneficial for estate planning purposes. Finally, it can provide tax benefits to the corporation, as the premiums paid on the life insurance policies are generally tax-deductible.
However, there are also some potential drawbacks to consider when using a life insurance-funded stock redemption agreement. Firstly, the premiums paid on the life insurance policies can be significant, particularly for older shareholders or shareholders with pre-existing health conditions. Secondly, the value of the life insurance policies may also fluctuate, which could impact the amount of funding available for stock redemptions. Finally, it is important to ensure that the terms of the stock redemption agreement and the life insurance policies are coordinated to ensure that there are no gaps in coverage or unexpected tax consequences.
In summary, a life insurance-funded stock redemption agreement can be an effective way for a corporation to fund the purchase of shares from a deceased shareholder`s estate. However, it is important to carefully consider the costs and potential risks before implementing this type of agreement. By working with an experienced attorney and financial advisor, a corporation can ensure that its stock redemption agreement is properly structured and funded to meet its needs.