Scenario / Situation
Client is selling 1/3 of his company to long-time manager.
The client’s lawyer recommended updating the existing shareholder agreement.
Who introduced client to us?
Client’s corporate lawyer.
Objectives
In the event of a death of a key shareholder, proceeds of the corporate owned life insurance policy will flow through the Capital Dividend Account (CDA) tax free to purchase outstanding shares from deceased shareholder’s estate.
Strategy / Solution
Proper valuation methods were used to determine the fair market value of the company.
New life insurance policies need to be purchased to cover liability, should either shareholder die.
The life insurance proceeds will be used to execute the buy-sell (shareholder) arrangement and repurchase the shares.
Alternative Options
The client could self insure (have funds readily available in the corporation to repurchase shares).
This is inefficient use of capital and leaves other issues open for legal challenges.
In the event of a death, fair market value must be negotiated with the deceased’s estate, increasing legal dealings with estate’s spouse and family.
Wrap up
The Capital Dividend Account (CDA) plays an important role in corporate life insurance planning.
This national tax account helps insure a level of tax integration and makes funding shareholder and partnership buy-sell agreements very tax efficient.
