Buy-sell agreements

Shareholders of private corporations often enter into a Shareholder's Agreement in order to

clearly define how the corporation is to be governed. A common feature of such an agreement is
the compulsory buy-sell provisions requiring the estate to sell the shares of a deceased
shareholder and the surviving shareholders to buy such shares, usually in proportion to their
respective shareholdings.

Briefly stated, the reasons for the compulsory sale by the estate and acquisition by the surviving
shareholders are as follows.

1. The shares of a private, closely held corporation are not readily marketable, if at all. This
is particularly true where the interest is a minority interest. Because the shares of the
private corporation may comprise the bulk of the estate, the executors will often wish to
sell this asset and realize the cash required to discharge taxes, pay final expenses and
provide capital for the deceased's heirs. The surviving shareholder would normally prefer
to take up the shares of the deceased (particularly if the deceased had a majority
interest) rather than risk a sale to a third party who would then become a business
associate.
2. The executors do not want to be in a position of having an interest in a private
corporation which is not an investment authorized by law for trustees. Notwithstanding
the fact that the retention of unauthorized investments may be authorized by a provision
in a Will, few trustees have the expertise or the desire to undertake an active role in the
management of such a business. Conversely, the surviving shareholders will generally
prefer to continue active management without the interference of the executors or a
surviving spouse.
3. While the deceased shareholder was alive, he or she would probably draw a salary in
return for his participation in the active management of the business. It is unlikely that the
executors or beneficiaries of the deceased would take an active role in management.
However, they would expect some return on their "investment," thereby necessitating
distribution of profits by way of a dividend. The interest of these passive partners may
conflict with those of the surviving active shareholders.

Benefits of the agreement

1. Immediate Benefits:
o The agreement will assist the owner or shareholder of a business in estate
planning since the value of the business will be determined by a procedure in the
agreement in the event of death or disability.
o The presence of an agreement can enhance the business' position in respect of
both creditors and customers. The continuation of the business as a viable entity
is somewhat assured.
2. For the estate of a deceased shareholder/partner or his/her heirs:
o A guaranteed market for the business is created,
o A fair price for the business is assured according to a procedure in the
agreement,
o Business responsibilities for the executor or surviving spouse are avoided,
o Estate settlement problems and costs are significantly reduced,
o A ready source of cash is available.
3. For the surviving shareholders/partner:
o The survivors are assured of a complete and immediate ownership,
o Funds are available to cover a purchase price predetermined by a procedure in
the agreement,
o The disruption to management of the business is minimized,
 o The presence of an agreement avoids undue concern by creditors or customers.

Provisions of the agreement

The agreement should specify that in the event one of the shareholders wishes to sell his shares
to an outsider he must first offer the shares to the remaining shareholder or shareholders upon
the same terms and conditions as he is willing to sell to the outsider.

The agreement should also contemplate the retirement or disability of one of the shareholders in
such a way that "retirement" and "permanent disability" are clearly defined and specify what
actions or steps are to be taken in the event that one of the shareholders becomes permanently
disabled or retires. If the specific occurrence contemplated is death, the agreement should spell
out the rights, duties and obligations of the remaining shareholders and the personal
representative of a deceased shareholder. The following list incorporates those points which
would be included in a well drafted agreement.

1. Parties to the agreement.

2. Shares of stock subject to the agreement.
3. Sale of shares of stock on first death, disability and early retirement.
4. Price to be paid.
5. Method of determining value.
6. Life insurance acquired to fund the agreement.
o Premium payments
o Default of premium payment
o Additional insurance required later
7. Payment of purchase price.
o If insurance proceeds are greater than purchase price
o If insurance proceeds are less than purchase price
8. Transfer by deceased's estate.
9. Prepayment of any balance under 7(b) above.
10. Restriction on survivors' salaries while any balance is unpaid under 7(b) above.
11. Default of survivors under payments applicable under 7(b) above.
12. Operation of company while money owing by survivors under 7(b) above.
13. Provisions relating to disagreements, disability or retirement.
14. Transfer or Pledging of shares of stock prohibited.
15. How insurance policies are accounted for in case of disability, disagreement or
retirement.
16. Amendments to the agreement.
17. Termination of agreement.
18. Binding on heirs and others.

The agreement could provide for the appointment of a trustee who would be responsible for
collecting the insurance proceeds and handling the transfer of shares.

Funding of an agreement

A buy-sell agreement legally obligates the survivors to purchase and the deceased's estate to sell
the business interests. However, it does not provide the funds necessary to implement the terms
of the agreement. The following are some methods to provide funding to effect the terms of the
agreement.

1. Payment out of profits over future years;

2. Payment through borrowed funds;
3. Payment through life insurance;
 4. A combination of the above.

Let's examine these methods.

Payment out of profits - The problem with paying substantial amounts from profits is that it
makes the deceased's estate totally dependent upon the survivor's successful operation of the
business and thus, negates the benefit the agreement was to provide in the first place.

Such payments will probably create an excessive financial burden to the survivor(s) in profitably
operating the business. Further, they may have to reduce their personal incomes for an extended
period until the deceased's interests have been fully retired under the terms of the agreement.

For instance, payment of $100,000 from after-tax personal income over a ten year period at a
10% interest rate, would require a survivor having a taxable income of $50,000 per annum, to
increase that income to an average of $86,900 in order to meet these payments and maintain the
same disposable income.

Payment through borrowed funds - This method has numerous disadvantages. The cost of
borrowing could run high and the funds would have to be repaid over future years thus probably
causing the same problems as outlined in method (1) - payment out of future profits.

It may have been assumed that a loan to the principals of the business could have been
negotiated in the same manner available at the time that all the associates were alive. However, if
it was one of the key operating members of the business that died, the lending institutions may
not have the same confidence in the future of the ongoing business and refuse the loan or reduce
the amount of funds available to the business and/or the business associates.

Payment through life insurance - Life insurance funding of the agreement is the only
reasonable and practical method for funding. It is the only asset which matures at death,
providing the funds necessary to carry out the terms of the agreement exactly when needed. The
cost of insurance funding is nominal compared to the cost of borrowing. Unlike a loan, the
insurance proceeds need never be repaid.

The use of life insurance to fund the purchase recognizes the fact that there may be insufficient
cash available to fund the share purchase on a timely basis. The liquidity created by insurance
proceeds allows for a quick turnover of interests. The estate receives cash with which to fund the
deceased's terminal year obligations and they invest the balance in a portfolio designed to suit
the needs of the beneficiaries of the estate. The surviving shareholders are free to continue the
active management of the business without interference and without having to impair their own
capital or cash flow positions to fund the purchase.

Types of Agreements

Having determined that a compulsory buy-sell agreement is desirable the parties must consider
the two basic forms of ownership available:

1. Shareholder owned Criss-Cross,

2. (a) Corporate owned Criss-Cross
(b) Corporate owned repurchase

Prior to discussing the types of agreement, it should be noted that a Family Law Act in some
provinces may impact on shareholder's agreements. The provisions in respect of the distribution
of assets during lifetime or subsequent to death may over-ride the provisions of an agreement. It
is important that the client's lawyer be consulted.

Shareholder owned criss-cross

In the traditional criss-cross arrangement, each shareholder is insured to the extent of his
respective interest under a policy that is owned and the premiums paid for, by the other
shareholder. On the death of a shareholder the proceeds of insurance are payable to the survivor
who would then use the proceeds to purchase the deceased's interest from the estate.

The results of this arrangement are as follows:

1. The proceeds of the life insurance policy would be received free of tax by the surviving
shareholder.
2. The capital gain for the deceased's estate is proportional to his shareholding.
3. The surviving shareholder would acquire the shares of the deceased at a cost equal to
the fair market value of the shares. The capital gains exposure is not changed.

There are two disadvantages to this type of procedure:

1. Since the individual shareholders own the policies they must pay the premiums with after-
tax dollars at what might be a relatively high rate. A shareholder in a 43% tax bracket
would be required to earn $1.75 in order to pay $1 of premium while many corporations
must only earn approximately $1.33 to pay $1 of premium.
2. The second disadvantage is particularly complex and involves the concept of
"indefeasible vesting" and tax deferral to a spouse.

A rollover (tax-free transfer) is generally available on assets which pass to a spouse and, in some
cases, to children or grandchildren. In order for the rollover to take place, the asset must pass
within a certain specified period of time to an identifiable person. It is in the determination of the
identifiable person that one of the problems of vesting arise.

For example: If a parent gives a child an option to buy a farm owned by the parent, then, at the
date of death, it is impossible for Canada Customs and Revenue Agency (CCRA) or anyone else
to determine to whom the farm will pass since the child may not exercise the option and the farm
may either by retained and given to other children as a form of in specie distribution or may be
sold to a stranger. Since there is no identifiable individual in whom the property vests at the time
of the death of the testator, then the rollover would not be available. The rollover would only be
available if, among other things, the property "vested indefeasibly" in a particular identifiable
person.

The Income Tax Act does not define the meaning of "vested indefeasibly" for the purposes of the
rollover and accordingly, the meaning of this term must be construed within the content of the
provisions where used. In all of the rollover provisions, the term "vests indefeasibly" refers to
particular property that, in consequence of the death of the previous owner, has been transferred
or distributed either to a spouse, spouse trust, or child of the taxpayer.

In CCRA's view, a property is vested indefeasibly in a spouse or child of the testator when such a
person obtains a right to absolute ownership of that property, in such a manner that such right
cannot be defeated by any future event, even though that person may not be entitled to the
immediate enjoyment of all of the benefits arising from that right. Although the problem of
indefeasible vesting is not limited to buy-sell agreements, we will nevertheless focus on the
problem as it affects agreements.
Interpretation Bulletin IT-449 sets out CCRA's position on buy-sell agreements on death. Where it
is compulsory for an executor to sell and for the surviving shareholder to buy, the deceased's
shares will not be considered to "vest indefeasibly" in the beneficiary. If the beneficiary is the
deceased's spouse, no rollover is available. Accordingly, the taxation on all of the accrued capital
gains would be payable by the estate of the deceased. In order to have the shares vest
indefeasibly, it would be necessary to have a "put-call option" in the agreement in such a way as
to avoid the mandatory provisions of the sale.

Consider the following example.

1. Messrs. A and B who are both Canadian residents each own 50% of a Canadian
controlled private corporation. Mr. A and Mr. B are unrelated and have each bequested
all their property to their respective spouses upon death.
2. Mr. A and Mr. B and their spouses enter into a shareholder's agreement which includes a
put-call provision in the event of the death of Mr. A or Mr. B. Assume that Mr. A dies.
3. The spouse of Mr. A or her legal representative shall have the option to require Mr. B to
purchase all of the shares in the company which are owned by the deceased at the time
of his death.
4. Mr. B shall have the option to purchase all the shares of the company which are owned
by Mr. A at the time of his death.

By using the foregoing put-call option, the shares will vest indefeasibly in the surviving spouse
and the rollover will be available, if required. The utility of the rollover will be partly determined by
the amount of the unused capital gains exemption of the deceased. As well, the surviving spouse
is in a position to take advantage of any forward averaging provisions which may be available. It
should be noted that the spousal vesting requirement imposes two additional complexities into
the buy-sell situation:

1. The spouse must be party to the buy-sell agreement.

2. The shares should be specifically bequested to the spouse in the Will of the shareholder.

In the Province of Quebec, the put-call option may not be used since the Civil Code prevents the
beneficiary (the spouse) from dealing with an asset comprising the estate prior to the death of a
testator.

Corporate owned life insurance

In this approach the corporation would own the policies of life insurance on the lives of the
individual shareholders, pay the premiums and would be the beneficiary of the proceeds. There
are two variations to buy-sell agreements funded with corporate owned insurance, both of which
will be described below.

Corporate repurchase

In this arrangement, the shareholder's agreement provides that following the death of a
shareholder, the shares of a deceased shall be repurchased by the corporation for an amount
calculated on the basis of an evaluation formula. It should be ensured that the corporate charter
permits the repurchase of its shares if this method is chosen

The tax consequences of the transaction will depend on several factors related to the effective
date of the agreement. Bill C69 currently before parliament (December, 1997) when enabled will
result in approximately the same level of taxation regardless of the arrangement. These are
known as the Stop-Loss Rules.
Grandfathered Share Redemption Agreements

An arrangement in place as of April 26, 1995 may be exempted from the new Stop-Loss rules if
certain conditions are met.

1. The agreement in writing was made before April 27, 1995,

2. Life insurance owned by the corporation was in effect on the life of the taxpayer on April
26, 1995 and a main purpose of the proceeds of the policy was to fund a repurchase of
shares.

The following example assumes the agreement meets the above requirement. Although the
principles are the same irrespective of numbers, we will assume that two shareholders A and B
own a company. On the death of A the following takes place.

1. The net insurance proceeds (death benefit minus the adjusted cost basis) flow to the
capital dividend account of the corporation.
2. A's death gives rise to a deemed disposition and, generally, a capital gain.
3. The share redemption money payable to A's estate under the buy-sell agreement is a
deemed dividend if it exceeds the initial cost of the shares to A.
4. The corporation then elects to turn the deemed dividend into a capital dividend.
5. At this stage, A's estate has received a tax-free capital dividend, if the company so elects,
and the shares have been transferred back to the corporation. We now consider the
effect of 1 to 5 on A's estate.
o The proceeds of disposition do not include the deemed dividend so that the high
fair market value minus the low proceeds of disposition creates a capital loss to
the estate.
o The capital loss will usually be greater than or equal to A's capital gain so,
o A's executors can elect to offset the estate's capital loss against A's capital gain.
The crux of the issue is that the estate of the first shareholder to die pays no tax
on capital gains while the exposure is passed to the surviving shareholder or
shareholders.

B now owns all of the issued shares of the company, which is equal in number to the shares he
owned prior to A's death, and his capital gains exposure has been doubled.

The following chart will indicate the position of A and B before and after A's death.

Assumed

• A&B each own 100 shares of ABCo.

• ACB $1 per share
• ABCo. FMV - $1,000,000

A Dies

• Deemed Proceeds $ 500,000

•
• ACB 100
• Capital Gain 499,900
• Capital Loss 499,900
• Net Captial Gain 0
• Net Proceeds from Sale $ 500,000
• Tax Paid NIL
B's Position

• 100 Shares, FMV $1,000,000

• ACB 100
• Capital Gain Liability 999,900
• Taxable Capital Gain $ 749,925
• Eventual Tax Liability @ 50% $ 374,962

For new arrangments and those not grandfathered, the Stop-Loss rules limit the tax-free dividend
to the 25% of the capital gain that would normally be exempt from tax.

A Dies

• Deemed Proceeds $ 500,000

•
• ACB 100
• Capital Gain 499,900
• Taxable Captial Gain 374,925
• Loss Carry Back from Estate $ 374,925
• (see Estate below)
• Net Taxable Gain NIL
• Tax Paid NIL

Estate

• Tax-Free Capital Dividend $ 124,975

• Taxable Dividend 374,925
• Return of Share Capital 100
• Total Proceeds 500,000
• ACB 500,000
• Capital Loss 499,900
• Allowable Capital Loss 374,925
• Carried Back to A 374,925
• Net Allowable Capital Loss NIL
• Net Tax Liability on $374,925 Dividend $ 140,597

B's Position

Same as above

Potential Tax Liability = $ 374,936

There are methods by which B could reduce the Potential Tax Liability so that total tax payable
would be approximately the same as in a Criss-Cross arrangement. If you have a specific case to
which this may apply, please contact your Financial Planning Services Representative.

Corporate owned cirss-cross

1. The net insurance proceeds (death benefit minus ACB) flow to the capital dividend
account of the corporation.
 2. The terms of the buy-sell agreement require B to purchase A's shares from the estate in
return for a promissory note.
3. B then owns all of the issued shares so he pays a dividend and elects that it is a capital
dividend and he uses the proceeds to redeem the note.

These transactions result in the same tax effect as in the personally owned criss-cross as follows:

1. A capital gain for A's estate proportionate to his shareholding.

2. Since B purchases the shares his cost base increases and his capital gains exposure is
not increased.

The capital gains exemption

The capital gains exemption will be a factor in drafting an agreement. The maximum lifetime
capital gains exemption has been eliminated for all property other than shares of small business
corporations or qualified farm property. The full $500,000 exemption on capital gains has been
preserved for the sale of shares in small business corporations and qualified farm property. A
capital gain on the disposition of a share of a small business corporation will be eligible for the
$500,000 exemption only where the corporation is a small business corporation at the time of
disposition and the shares were not held by anyone other than the taxpayer or persons related to
him/her throughout the immediately preceding 24 months. A small business corporation is
generally defined as a Canadian controlled private corporation that uses all or substantially all of
its assets in an active business carried on primarily in Canada, and includes small business
corporations whose assets are shares in operating companies who themse

lves qualify as small business corporations. The cumulative exemption for shares of a small
business corporation was increased to $500,000 at the beginning of 1988.

The rules surrounding the capital gains exemption are extensive, for example, all or substantially
all of the assets (90 %) of a small business corporation must be used to earn active business
income. The cash value of a life insurance policy is not a qualify asset for the 90% test.

Recent amendments to the Act add further complexity where corporate owned insurance on the
life of a shareholder is used to fund a buy/sell agreement. The insurance proceeds must be used
to redeem, acquire or cancel the shares as required by the agreement within 24 months of the
death of the shareholder. Any amount not so used will be included in the non active business
assets of the corporation and could disqualify the shares from eligibility for the $500,000 capital
gains exemption.

Because the complexity of the rules and, where shareholders consider the use of the capital
gains exemption important, it is probably wise for the shareholders to discuss methods of
crystallizing the capital gains exemption with their accountant.

Variable share ownership

The use of corporate-owned insurance to fund a buy-sell agreement introduces additional

considerations. In a situation where the shareholders own an equal interest in the company and
their ages are almost identical, no inequity will exist. However, in instances where the interests in
the corporation vary and the ages differ, inequities do result, usually to the disadvantages of the
older and/or majority shareholder(s).

For example: if shareholder A, age 50, owns a 60% interest in XYZ Limited, with a value of
$120,000, and shareholder B, age 30, owns a 40% interest with a value of $80,000, the cost of
insurance on the life of A which would be used for the benefit of B to purchase A's shares under
the buy-sell agreement would be $3,877 per annum, while the cost of the insurance on B which is
for the benefit of A would be $1,096 per annum. With the company paying the premium,
shareholder A indirectly will bear $2,984 of the total premium (60% interest) while shareholder B
will bear only $1,989 of the premium (40% interest). Thus shareholder B will derive the greatest
benefit while shareholder A absorbs the greatest portion of the cost.

Even if the arrangement is concluded on a personal basis, the result is basically the same. It
would be necessary for the company to pay sufficient bonuses to the shareholders to enable
them to pay the premiums, with B requiring the greater amount to pay the premium for the
insurance on A's life. A more equitable distribution would result with bonuses declared and paid
based on each shareholder's respective interest combined with the value of the shareholder's
contribution to the company. A distribution in this manner would be carried out without regard to
the cost of the life insurance.

In addition to the cash flow savings, corporate-owned insurance offers a second advantage in
that it mitigates the cost inequalities of insurance premiums resulting from disproportionate
shareholders. The cost inequality is offset to some degree by the cash saving resulting from
corporate-owned insurance. It will also alleviate any cost inequality which may result from an age
or health differential that may exist between two or more shareholders.

Life insurance proceeds and shar valuation

The flow of life insurance proceeds to a corporation has raised an interesting question in the past:
what amount of the death benefit, if any, should be included in valuing the shares owned by the
deceased? Possible answers have included the following: the face amount of the contract, the
cash surrender value immediately prior to death, an amount approximately equal to the death
proceeds, or some other amount. The question is central to the use of corporate-owned
insurance since if the life insurance is held to increase the share value then, of course, death will
increase the capital gains exposure in the shares owned by the deceased. The deemed
disposition on death would then be for an amount which would be greater than if the insurance
had been owned on a personal criss-cross basis.

In 1978, a landmark case - the Mastronardi Estate v The Queen took place. Prior to the case,
Revenue Canada's regulations as they applied to life insurance proceeds resulting for a policy
owned by a corporation was to include the value of the life insurance in determining the share
value of the deceaseds' interest. In the Mastronardi case, the court held that

immediately before death should not be construed as meaning equivalent to the instant of
death, nor should they impart a necessity of valuing property, taking into account the imminence
of death. In determining the value of the shares the value of the insurance policy should be
disregarded and therefore, the fair market value of each share immediately before death was ... .

Revenue Canada appealed the decision to exclude the value of life insurance proceeds from the
share value and the appeal was dismissed.

This decision against Revenue Canada resulted in a revision to Interpretation Bulletin-416 which
was re-issued as Interpretation Bulletin-416R on May 5, 1980. In the Bulletin, Revenue stated
that for the purpose of valuing shares, it is not to be assumed automatically that the value of the
insurance policy is the proceeds payable on death simply because death occurred immediately
after the point in time when the valuation of the shares must be made. The insurance policy
should be viewed as a component of the assets underlying the shares and should be valued in
accordance with normal valuation practices taking into consideration all facts relevant to the
particular case. The value established for the insurance policy immediately before death should
be based on relevant factors relating to the deceased shortly before death, for example the day
prior to death. The major factors that should be taken into consideration were:

1. the cash surrender value, if any, of the policy,

2. the life expectancy of the insured based on mortality tables,
3. the state of health of the insured as it would be known to other persons.

The Bulletin went on to point out that the value of an insurance policy could approach its face
value if it was known that the insured had a terminal illness or was critically injured and not
expected to recover. On the other hand, it would have little value if a person in apparently
excellent health were to die unexpectedly as a result of an accident or heart attack.

Clearly, Revenue Canada was backing away from its initial hard and fast position. However, the
insurance industry was forced to rely on the uncertainties in the foregoing Bulletin until the budget
of November 12, 1981. The legislation which resulted from that budget provides that where the
death occurred after December 1, 1982, sub-section 70(5.3) provides that the value of the
insurance policy immediately before death shall be the cash surrender value at that time.

A step backward

In Revenue Canada's Information Circular No. 89-3, a policy statement on business equity
valuation, dated August 25, 1989, the department has stated an opinion that is reminiscent of the
late 1970's.

Paragraphs 40 and 41 of this circular address the amount of a Corporate-owned life insurance
policy that will be included in valuing the shares of a deceased shareholder (where death occurs
after December 1, 1982) and confirms that the cash surrender value will be included. The
surprise comes in what follows, wherein they say, "this applies to the deceased, but where there
are two or more shareholders and corporate-owned life insurance is required to fund a stock
purchase agreement, one must determine the value of the policies held by the corporation on the
other shareholders".

The factors that they suggest as being relevant in valuing the policies held by the corporation, on
the surviving shareholders include:

1. the cash surrender value;

2. the policy's loan value;
3. face value;
4. the state of health and life expectancy of the insured;
5. conversion privileges;
6. other policy terms; and
7. replacement value.

This circular goes on to say, "If the death of one of the shareholders for which corporate life
insurance is owned is considered imminent and it is proper to consider this factor in valuing a
policy, the value may be greater than the policy's cash surrender value. However, one must also
consider the following factors:

1. the possibility that the insured will recover and not die;
2. the effect that the loss of a key person would have on the business operation;
3. whether the share interest being valued represents a majority or minority of the
outstanding shares; and
4. the importance attached to factors other than asset value in the circumstances, such as
the future earnings expectations and the prospects for dividends".
The opinions expressed in this Information Circular are not law but they do reflect the
department's view on corporate-owned insurance.

Buy-sell agreement and share valuation

A central issue that arises when a deceased taxpayer has entered into a buy-sell agreement or a
corporate repurchase agreement to sell his shares at a fixed price or according to a formula, is
whether the shares owned by the deceased are to be valued according to the terms of the
agreement or by some other means.

Non-Arm's Length Transaction

The valuation of shares under a buy-sell agreement for persons who are related to each other or
otherwise do not deal in arm's length is different. The rules outlined in section 69(1)(b) of the Act
concerning inadequate consideration will apply. These rules deem that a party not dealing at
arm's length will have received proceeds of disposition equal to the fair market value of the
property regardless of the price specified in the buy-sell agreement. Thus, the result of a sale
under a buy-sell agreement where the parties do not deal at arm's length and the sale price is
less than the fair market value, is the acquisition of the shares by the estate at fair market value,
with the surviving shareholders acquiring the shares at the buy-sell price. In this case the estate
will be deemed to have acquired the shares at fair market value and in turn deemed to have
disposed of them at fair market value to the surviving shareholders. Therefore, no capital loss
would arise which would offset the capital gain.

Where such circumstances exist, it is best to avoid stating a price in the agreement.

RCAs and buy-sell agreements

In the discussion of RCAs, it was indicated that the insurance policies funding a buy-sell would
not be deemed to be RCA's, if the agreement is properly drafted. As well, if criss-cross funding is
used, there is no employer-employee relationship and there would not be an RCA problem.
Finally, there will not be a problem if the agreement is funded with term insurance which has no
cash surrender value.