Question

14 suzan and laura are the two shareholders of sl inc. they recently implemented a buy - sell agreement that required sl inc to purchase life insurance for suzan and laura. the agreement is such that, if one of the shareholders dies, her shares will be transferred to her estate. sl inc will use the insurance proceeds to redeem the shares which will then be cancelled. the remaining shareholder will now own 100% of the company’s shares. which of the following types of buy - agreement has the company implemented?
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a. split - dollar arrangement
b. share redemption plan
c. cross - purchase agreement
d. cross - cross insurance plan
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Explanation:

To determine the buy - agreement, we analyze each option:

• Option a (Split - dollar arrangement): This is mainly about sharing life insurance costs and benefits between an employer and employee, not about shareholder share redemption in a buy - sell agreement context. So, this is not the correct option.
• Option b (Share redemption plan): In a share redemption plan, the company buys back the shares of a deceased (or exiting) shareholder. In this case, when one shareholder dies, SL Inc. will redeem the shares (buy them back) which will then be cancelled, and the remaining shareholder will own 100% of the company. This matches the scenario described.
• Option c (Cross - cross purchase agreement): In a cross - purchase agreement, the remaining shareholders (not the company) buy the shares of the deceased shareholder. Here, the company is the one redeeming the shares, so this is not correct.
• Option d (Cross - cross Insurance plan): There is no standard buy - sell agreement type called "Cross - cross Insurance plan" related to this context, and it does not fit the description of the company redeeming the shares.

Answer:

b. Share redemption plan