5 ownership structures of buy and sell life insurance agreements
When life insurance is utilised to fund a buy and sell agreement, the business owners/partners must consider an ownership structure that is appropriate to their individual situation and objectives. There are 5 ownership structures for buy/sell life insurance agreements and these include:
Self-ownership
In this ownership structure, business owners hold an insurance policy on their own lives. When a trigger event occurs, the departing owner or their estate is generally required to give up their share of the business to the surviving owners. Pros and cons include:
|
|
Cross-ownership
With this type of ownership, each shareholder owns an insurance policy on the other owners of the business. Any insurance proceeds can be used by the surviving owners to purchase the departing owner's share of the business. Pros and cons include:
|
|
Corporate ownership
In a buy/sell life insurance agreement with corporate ownership structure, the business partners do not own life insurance policies on each other. The corporate entity owns the insurance policies on behalf of the owners of the business.
So, in the event of death or permanent disability of one of the owners, the entity will buy out the departing owner's share of the business using the proceeds from the insurance policy. Pros and cons include:
|
|
Discretionary trust ownership
With discretionary trust ownership structure in a buy/sell agreement, an independent trustee of a discretionary trust has been appointed to hold insurance policies on behalf of all of the lives insured.
When a trigger event occurs, the trustee will then divide the proceeds of the policy to the continuing owners, which can be used to purchase the departing owner's interest in the business. Pros and cons include:
|
|
Superannuation ownership
This structure can be considered as a variation of self-ownership, as the insurance policies are owned and structured through a superannuation fund, as opposed to under each of the business owners' names.