In the course of advising Mad Golf Inc. in the below problem labeled A, the shar
ID: 443663 • Letter: I
Question
In the course of advising Mad Golf Inc. in the below problem labeled A, the shareholders decided to cancel the life insurance. They think it is "way too expensive and not really needed." - They have concluded that it is likely that they will sell the business in the next five to eight years so that they can all "retire and play golf until they drop." - They figure that the odds of one of them dying in that time period is very low. If it does happen, the others will buy the stock of the deceased under an installment payment plan until the company is sold, at which time the family of the deceased shareholder will be paid off. What do you think of the shareholders' plan? What changes, if any, would you suggest?
A.
Mad Golf Inc., a successful C corporation, has three shareholders: Larry, Brice and Joe. All the shareholders are in their early fifties. The company has a redemption buysell agreement funded with corporateowned life insurance. If a shareholder dies, the company will use the life insurance death benefit that it receives taxfree to redeem the stock of the deceased shareholder. Joe recently attended a financial planning seminar and learned that their redemption structure structure was "all wrong" because because the remaining remaining shareholders shareholders received received no stepup in their stock basis for the amounts paid to the deceased shareholder. He claimed they were "wasting a huge income tax benefit" because it was likely that the surviving two would probably "sell the company and cash in if one of the partners kicked the bucket." Joe is adamant that the agreement be changed to a crosspurchase structure immediately. You have been retained by the company to deal with Joe's demands. How would you advise the shareholders?
Explanation / Answer
I think plan of Mad Golf Inc.shareholders is not adequate. Decision made by shareholders for dropping life insurance because life is uncertain and without life insurance they have increased the huge risk.
I would rather suggest that they should have sufficient insurance to safeguard the interest of the company.