Too Much or Not Enough?
If a shareholder dies and the life insurance proceeds on the deceased exceed the purchase price of his/her shares of stock, the excess is retained by the beneficiary of the policy unless the Shareholders Agreement states otherwise.
But what if the value of the deceased’s ownership in the agency exceeds the proceeds of the life insurance policy? Unless the Shareholders’ Agreement states otherwise, the surviving shareholder will have to find a way to come up with the shortfall. If he/she is unable to do that, it could force him/her to sell the agency. A well structured Shareholders’ Agreement will address shortfall situations and provide the surviving shareholder with the option to pay off the balance due the deceased’s estate over some period of time at a reasonable interest rate.
Properly crafted Buy-Sell Agreements are critical for the agency to survive the death of a shareholder. Failing to properly structure such agreements can result in lawsuits, additional taxes, and the potential “death” of the agency itself. If you don’t have an agreement or if you haven’t reviewed it recently, it is wise to engage a professional to assist you in this “life and death” situation.
About the Author — Jon Persky, CIC, CPA, PHR
Jon is the president of Optimum Performance Solutions, LLC (www.optperform.com), an insurance agency consulting firm providing valuation, merger and acquisition, agency perpetuation, strategic planning, and marketing and retention services to insurance agencies nationwide.
Jon is on the national faculty of the Society of Certified Insurance Counselors and lectures on agency management topics throughout the United States. He can be contacted at 813-835-7337 or firstname.lastname@example.org.
Originally published in the Winter 2011 issue of Resources magazine.