You are the owner of a closely held corporation. If one of the shareholders dies prematurely, your business could suffer immediately. Creditors could become uneasy, customers may shop elsewhere, and you may inherit shareholders you’d rather not be in business with. You may even be forced to sell the business at “fire sale” prices. The forced sale of any business is rarely a profitable event.
The Solution
You start by entering into a shareholder agreement, clearly setting out all terms, conditions, rights and values connected to the disposition of any given shareholders’ interests. You then purchase a suitable amount of Universal Life insurance to fund the agreement in place. Upon the death of any shareholder, the tax-free proceeds of the Universal Life product are used to fund the transfer of the deceased owner’s interest to the surviving shareholders, allowing the business to carry on as normal, without fear of creditors, lost customers, or unwanted heirs becoming shareholders.
The heirs of the deceased shareholder receive funds from the disposition, which are distributed according to the will in place.
Universal Life is also an excellent tax shelter with attractive linked investment choices, such as US Equities, Balanced Accounts, European Accounts, or even Guaranteed Interest Accounts. The selection of indexes can accommodate your investment style should you choose to use them. It’s your option.
Business owners have an additional advantage with Universal Life – they can have their business pay for the cost of insurance through a “split dollar agreement”, and use the tax shelter for their personal investing.
This is a simple and cost effective technique commonly used in business succession planning, and many Canadian businesses are taking advantage of this strategy.
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