David owns 75 percent of the stock of Smith Industries, which is operated as an
ID: 2774066 • Letter: D
Question
David owns 75 percent of the stock of Smith Industries, which is operated as an S corporation. Walter owns the remaining 25 percent. - David is the driving force behind the company. It is doubtful the company could survive without David. - Walter is a purely passive investor. Smith Industries has a standard crosspurchase buysell agreement that is triggered if one of the shareholders dies. The other shareholder is obligated to buy the stock of the deceased shareholder. - The company is now valued at $12 million. - Walter owns a $9 million policy on David's life, and David owns a $3 million policy on Walter's life. The company funds the premiums on the policies through bonuses to the shareholders. You represent David. What is wrong with this situation? What changes would you recommend? How would you implement those changes?
Explanation / Answer
What's Wrong ?
Assume David Dies
Return to David's Family:
Return to Walter:
With current Situation David family will under loss as compared to Walter
Recommended Changes:
David take $3 Million Insurance Policy on Walter and David Family take $9 Million on David. Walter will have no policy in the name of David
Now Assume David Dies:Business Sold for $12 Million
Return to David's Family:
Return to Walter
Under current scenario; David family will have advantage against Walter
Implement Changes:
The above changes can be implemented by restructuring Insurance Policy. It can be done easily as he is the driving force behind the company
Changes Recommended
Proceed from Sale 9 Million Estate Taxes (4 Million) Net Return 5 MillionRelated Questions
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