In my experience it is not always the actual complexity or cost that delays this valuable planning
Often delays are a result of our perception. The perception that drafting a shareholders agreement is too complicated coupled with the notion life insurance premiums will be cost prohibitive.
The good news is there is no need for you to be an expert in the area of shareholder agreements. The shareholders agreement is a legal contract and thus should be drafted by a lawyer who specializes in this area. Your lawyer will ask you questions to gain an understanding of your business and to help ensure your shareholders’ agreement will be reflective of your planning requirements. In all likelihood your lawyer and your accountant will communicate with you and each other to ensure everyone is on the same page. For the business owner this is all quite guided. You are asked a series of thought provoking and important questions but ultimately escorted through the process.
So does the cost negate the benefits of planning? The costs of upfront planning can usually be estimated and therefore budgeted for. In addition upfront planning helps ensure all parties are in mutual agreement. Unfortunately, a lack of planning can lead to less than agreeable outcomes. If you are lucky it may go smoothly however there is a chance that unanticipated and costly challenges can arise at a later date.
Using insurance to fund the buy-sell of the business upon death can prove to be economical especially when the cost of alternative funding options are examined. The amount of insurance you should purchase can be estimated by your insurance advisor or calculated by your accountant. Your insurance advisor will help guide you through the insurance plan design options as well as the application process. While the life insurance policies are in effect if an insured dies the life insurance proceeds become payable tax-free to the named beneficiary. It is important to note that without a shareholders agreement in place there is no requirement for the proceeds to be used to fund the buy-sell.
Is it reasonable to postpone drafting the shareholders agreement or purchasing the life insurance? The truth of the matter is we do not know because we do not know when a business owner might die unexpectedly. What we do know is that if a business owner dies with a proper plan and buy-sell funding in place the business that is left behind stands a better chance of survival.
At Benefits Consulting Plus we recommend our clients include their own trusted lawyer and accountant in the shareholders agreement and buy-sell planning processes. The amount and type of insurance the client decides to apply for is a combination of insurance need and premium affordability. There is never a cost to meet with us or pressure to buy. When you are ready to having a buy-sell insurance discussion please contact us.
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t: 613 546-2282