What options does Buy-Sell Insurance give business owners?


When a co-owner/partner dies, the surviving business owners usually have five options in dealing with the deceased owner’s business interest:

1.   Buy-out the heirs of the partner with Life Insurance proceeds: This is usually the most preferred option. After all, the surviving owners/partners know how to run their business. It usually makes sense to buy out the heirs who are not engaged in or lack expertise in the business and carry on business from there.

2.  Keep the heirs in the business.  This would only be advisable if the heir was actually involved in the business for some time, or has skills that can advance the cause and profitability of the business.

3.  Take on an outsider who purchases the deceased’s business interest. A good buy-sell agreement can circumvent the need to have an outsider buy into your business if that arrangement would harm the current business partnership or the business. In some cases an outsider may already have an investment in, have expertise in, or a common business goal with your company that would mutually benefit everyone in the business. In this case, advance planning could allow such an individual to be part of buying side of the buy-sell agreement. The same individual may need to be a beneficiary on the insured lives of all the partners, in tandem with being written into the agreement.

4.  Selling to the heirs may be an option. This may be an option when some of the heirs are involved and successful in the same line of business with primary senior family members of the earlier generation who began your business. In this case the considered heirs, should receive funding from the proceeds of a well-planned fund to cover capital gains taxes, and fund operations, and pay for the owners shares.

5.  Liquidate the business or sell it to a third party. If this is the main goal, it is wise to involve discussions with the potential buyer long before one dies. If the business is large you may need to hire a firm that specializes in valuing and selling businesses. It is wise to estimate your capital gains exposure and cover any tax liabilities, as well as redeem business debts with the proceeds of life insurance which can be paid out tax-free.

In most cases, option #1 offers the business owners the best choice, with a small expenditure to buy life insurance that makes a payment to heirs with the use of a buy-sell agreement.

How do I make a claim as an heir to an estate?

If you intend to have control over the distribution of your estate it is important to have a testamentary trust (a will) drawn up by your lawyer.

If you die without a will, the Provincial Court will appoint the estate’s trustee referred to as the Public Guardian and Trustee. Any person claiming a share of your estate will then have to prove that they are entitled to and will have a right to inherit. Your estate will be distributed as follows:

• The largest share goes to the spouse (initial amount differs per province);
• Then the remaining estate value goes equally to the spouse and children, shared according to specific figures;
• If no spouse, to the children and descendants of the deceased, if any;
• To the parents of the deceased if no spouse or descendants;
• If no surviving parents, to brothers and sisters, and children of the deceased brothers and sisters;
• If no brothers and sisters, then to living nieces and nephews;
• When more remote relatives are involved, special instructions may apply.

NOTE: Half-blood relatives share equally with whole-blood relatives. Children include those born outside marriage and adopted ones.
The above is based on Ontario law. The law differs according to your province of residence and current law.

How do I prove that I am an heir of an estate?
You will need evidence to submit to the Public Guardian and Trustee assigned by the Provincial Court. You will need:

• Two sworn statements or affidavits. The first statement must be made by a person claiming a share of the estate (called the claimant). The second corroborates the first and is made by someone who has personal knowledge of the family history, but no monetary interest in the estate.

• A third sworn statement may also be needed from a resident who knew the deceased, stating his/her knowledge of the deceased’s reputation as to marital status and the existence of children born inside or outside marriage or adopted.