- How to Transfer Ownership of Stock in a S Corporation
- Accounting for an S Corporation Shareholder Buyout
- How to Redeem Stocks for Deceased Owners
- Can You Get Out of an S-Corporation at Any Time?
- What Equity Accounts Should I Have for an S-Corp With Two Partners?
- Can an Irrevocable Trust Be an S-Corporation Shareholder?
A small corporation with only a couple of shareholders may be like a partnership in some aspects of its operation. The shareholders may work closely together, and rely on each others' input on business matters. If one of the shareholders were to die, he may want to leave the value of his stock to his heirs in a will, while allowing the partner to assume complete operation of the business. A repurchase agreement with a life insurance policy can facilitate this transfer of the business, as well as provide money for heirs.
Plan for the continuation of the business after your death so that nobody is caught off guard. Decide how much your shares of the business are worth well in advance. Reach an agreement with your business partner on this amount.
Draft a repurchase agreement. The agreement should state that your business partner has the right to repurchase your corporate shares if certain events happen. In addition to death, you may also want to include incapacitation or financial insolvency as well, in order to provide extra protection for the continuation of the business.
Obtain a life insurance policy on yourself in the amount necessary to allow the partner to re-purchase the shares from your estate upon your death. Name your heirs specifically on the policy as the beneficiaries. The repurchase agreement should also clearly state that the life insurance proceeds serve as the re-purchase of the shares by the partner. In addition, the partner should pay for the policy. Repurchase life insurance policies are not deductible as business expenses.
Review the repurchase agreement and life insurance amount periodically. If the asset value of the business changes, be certain that the repurchase agreement specifies a new purchase price. Be certain that the life insurance value is increased as necessary to cover the increase in value.
If you do not have any heirs, you can will the shares to your business partner, and the shares will pass directly to him through your estate. Consult with a business and estate planning attorney to draft the repurchase agreement.
The life insurance is necessary to cover the value of the shares and be certain that your heirs are compensated, but it is also important because the shares could become part of your estate, and could be taken to settle any claims against it. The life insurance should divert the claims away from the corporate shares, and provide cash to settle any problems and preserve the shares for the business partner.