Drafting Considerations for Attorneys Blog Series – Treatment of Life Insurance in Buy-Sell Agreements
By Sean R. Saari, Partner, Advisory Services
The fields of law, accounting and valuation are only continuing to become more complex. Given the overlap in these areas of specialty, it is increasingly important for attorneys to have an understanding of the accounting, tax and valuation effects of the legal agreements they draft. Armed with this knowledge, lawyers can produce the intended outcome for their clients and minimize unintentional consequences and compliance burdens.
Treatment of Life Insurance Proceeds in Buy-Sell Agreements
If a company has life insurance in place to fund the buyout of an owner upon his or her death, it is important to identify how the proceeds from the insurance policy will be treated in the valuation of the company. As shown in the example below, the payouts to the exiting owner and the value retained by the purchasing owner can vary significantly depending upon the amount of insurance proceeds and the treatment of those proceeds for valuation purposes.
Essentially, if the insurance proceeds are included in the value of the business for buy-sell purposes, both the exiting owner and purchasing owner will have a similar amount of proceeds/value after executing the buyout. If the insurance proceeds are not included in the value of the business, then the exiting owner will receive a payout based on the value of the business immediately prior to his or her death and the purchasing owner will receive the full benefit of the insurance proceeds.
Continue reading about the key accounting, tax and valuation considerations of buy-sell agreements in our e-book: Drafting Considerations for Attorneys: Buy-Sell Agreements, Accounting, Tax, and Valuation Issues.
To learn more about how a business is valued or to gain insight on the financial and economic issues that affect today’s business world, call the experts in the Valuation and Litigation Support group at 440-449-6800. Please email Sean Saari if you would like to learn more about buy-sell valuation considerations.