DIY Business Planning gone wrong

Here is a court case example: Case Name: Selzer v. Dunn

Life insurance is often used to buy out a deceased owners share in a business so the family is compensated and so the other owner(s) do not have to be partnered with the deceased owner’s family. However DIY business planning in this regard can be disastrous.

In this case two co-business owners purchased a $2,000,000.00 life insurance policies on each other’s lives. It appears to most that the original intent was to have the life insurance fund the purchase of the decedent’s shares at his death. When one of the business owners died, the proceeds were paid to the surviving shareholder.

The family of the deceased owner wanted the surviving owner to turn over the insurance proceeds in return for the stock, but the owner refused. The court concluded that the surviving owner was not required to use the life insurance proceeds for the purpose of purchasing the decedent’s stock. It determined there was neither an oral agreement nor an implied trust.

It is interesting to note that an attorney had prepared three drafts of a buy and sell agreement for the owners, but they never signed them. Even though the owners obtained life insurance to fund a sale, the sale failed for lack of a binding buy-sell agreement.

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