Shareholder Planning

Having an effective plan between shareholders is critical for both the company and the families involved; it is even more important where there are multiple shareholders within the corporate structure or where shareholders are unrelated or at different stages in their life.  Often an agreement is loosely defined or based on a handshake between owners; having a properly documented and legally binding shareholders agreement is a must. Another common challenge with shareholder agreements is the funding mechanism. It is important that the agreement is fully funded and that either the remaining shareholders or the company has the means to promptly follow through on their end of the agreement with the required funds.  The lack of a fully funded properly documented agreement may result in unintended partnership arrangements or a hardship for the deceased shareholders family as well as surviving shareholders.

There are many ways to fund a shareholders agreement. Depending on the agreements structure, either the company or the individual shareholders will have to write a cheque. This means having to reserve cash for some indefinite point in the future. For most companies and shareholders this is an inefficient use of capital. One efficient funding method is to utilize a tax-exempt life insurance platform.  Life insurance can provide funding between shareholders and it can also be used to fund a retirement or exit strategy.

In most situations shareholders fill critical roles within an organization.  The unexpected loss of a partner often represents a major challenge for the organization.  Key corporate, banking or client relationships often become stressed, jeopardized or lost which can impact a company’s cash flow position.

In the event of a shareholder’s agreement being triggered a prompt source of cash is required for either the company or the remaining shareholders.  Life insurance is one of the most efficient ways in the market place to create a prompt source of tax-free cash when it is required most. As with any corporate transaction, the creation of deductible cash outflows is a major consideration.

Tax exempt life insurance provides a business owner with some unique tax planning opportunities not found in other financial vehicles.  Understanding these benefits is critical when making informed shareholder planning decisions.