Tuesday, February 15, 2022

Buy-sell deeds: pricing to pay** the premium?

One issue that comes up regularly in the context of insurance funded buy-sell arrangements is who should be responsible for the payment of insurance policy premiums.

Depending on the policy ownership approach adopted and the underlying business structures, there are a range of alternatives, including:
  1. Each principal pays a premium on their own policy.
  2. All principals contribute a proportion of the total premiums for all policies, equal to their respective equity interests in the business.
  3. Each principal pays an exactly equal proportion of the total premiums based on the number of principals (regardless of their underlying equity interest).
  4. If there are only two principals, sometimes the approach will be that each principal pays premium for the other.
As previous posts have touched on, there are a myriad of tax consequences that can arise from each of the various alternatives.

Assuming that these tax consequences can be managed, generally the pragmatic approach is to apportion the total premiums payable for all policies in accordance with the equity interest of each principal.

While this will not necessarily be seen as fair by each principal in all scenarios, it does keep things relatively simple and also helps the principal's focus on what should be the overriding objective of any insurance funded buy-sell arrangement. That being, to facilitate a smooth transition of a business in a factual scenario where the prospects of a smooth transition otherwise occurring are unlikely.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, the title today is riffed from the Janes Addiction song ‘Price I Pay’.

View hear (sic):