Corporate Succession Planning and Estate Equalization

This can be a very challenging exercise in the sense that ‘fair’ and ‘equal’ have a very different meaning and context. For example: if there are multiple siblings within a family and one is working for the family business, whereas the other siblings do not, poses many challenges around succession planning and estate fairness. The sibling working for the business might assume a sweat equity component with the business solely being inherited by one or multiple siblings, whereas the other siblings may or may not assume an inheritance of the same value of the business' fair market value. This can lead to significant financial strain on the business tying up cash flows and potentially assets to be sold in order to meet the estate equalization needs if not planned properly.

1. Buy-Sell Agreements: With the assistance of legal and financial advisors, the company establishes buy-sell agreements among shareholders. These agreements outline the terms and conditions for the purchase and sale of shares upon predefined triggering events, such as the death of a shareholder.
2. Funding Mechanism: Corporate life insurance policies are acquired on the lives of key shareholders or owners. In the event of their death, the proceeds from these policies are utilized to fund the buy-sell agreements, enabling the surviving shareholders to purchase the deceased's shares at a fair market value.
3. Equitable Distribution: The proceeds from the life insurance policies facilitate the equitable distribution of wealth among heirs. Those not actively involved in the business receive their fair share of the estate, while those continuing the business retain ownership and control.

Benefits and Considerations

Implementing corporate life insurance for estate equalization offers several benefits:

• Fairness and Stability: By ensuring fair distributions (it may not be equal to the business valuation), businesses foster harmony and stability among family members and stakeholders.
• Continuity and Viability: Smooth transitions of ownership prevent disruptions to business operations, preserving continuity and long-term viability.
• Liquidity Management: Life insurance provides liquidity precisely when it's needed most, enabling seamless transfers of ownership without jeopardizing the company's financial health.
• Tax Advantages
• The policy premiums are funded and paid by the corporation. Note – the premiums are not tax deductible.
• The corporate life insurance death benefit over the cost basis of the policy can be paid as a tax-free capital dividend upon death.

It is also essential to consider various factors such as liquidity and access to the funds, premium affordability, and changes in business dynamics over time. Regular reviews and updates to the estate plan and insurance policies are necessary to adapt to evolving circumstances and regulatory changes.

Overall, there are tax benefits of owning corporate life insurance to manage succession planning, and estate equalization stands as a cornerstone for maintaining fairness and stability. Corporate life insurance emerges as a robust solution, offering a strategic framework to balance inheritances while ensuring the continuity and viability of the business. By embracing this approach and leveraging the expertise of financial and legal professionals, businesses can navigate the complexities of estate planning with confidence, securing a prosperous future for generations to come.

There are many different options and features available when looking into corporate life insurance. Contact our Wealth Management team to explore custom solutions and options to assess the implications specific to your circumstances.