When starting a business or forming a corporation in Canada, it’s important to have a shareholders agreement in place. This legal document outlines the rights and obligations of the shareholders, as well as how the company will be managed and how decisions will be made. One important aspect of a shareholders agreement is how shares will be valued and how they will be bought and sold in the event of the death of a shareholder.
One way to fund a shareholders agreement is through life insurance. Here’s how it works:
1. Determine the value of the shares: The first step is to determine the value of the shares in the company. This can be done by having a professional valuator appraise the company, or by using a formula outlined in the shareholders agreement.
2. Purchase life insurance: Once the value of the shares has been determined, the shareholders can purchase life insurance policies on each other’s lives, with the coverage amount equal to the value of the shares.
3. Name the corporation as beneficiary: The shareholders can name the corporation as the beneficiary of the life insurance policies. In the event of the death of a shareholder, the corporation will receive the death benefit from the policy.
4. Use the funds to buy back shares: With the death benefit from the life insurance policy, the corporation can then use the funds to buy back the shares from the deceased shareholder’s estate. This allows the remaining shareholders to maintain control of the company and ensures that the deceased shareholder’s family receives fair compensation for their shares.
Using life insurance to fund a shareholders agreement provides a number of benefits:
1. Provides liquidity: By having life insurance in place, the corporation has immediate access to funds in the event of the death of a shareholder, without having to sell assets or take out loans.
2. Fair compensation: By valuing the shares and purchasing life insurance coverage equal to that value, the deceased shareholder’s family receives fair compensation for their shares.
3. Maintains control: By using the funds to buy back the shares, the remaining shareholders can maintain control of the company and avoid having to bring in new shareholders or partners.
Using life insurance to fund a shareholders agreement is an effective way to ensure that a corporation can continue to operate smoothly in the event of the death of a shareholder. It provides liquidity, fair compensation, and helps maintain control of the company. If you’re a shareholder in a corporation or working on a shareholder agreement, click here and click the “Book a Strategy Session” button to set up a free insurance analysis from Finuity Wealth.
