At the heart of a good business succession strategy is the planning that provides for the efficient passing of the business should the owner or one of the owners, die, become disabled, or wish to, or have to, leave the business for another reason. Buy-Sell Planning is one component of business planning and should be viewed within the context of long term business and succession planning. A Buy-Sell Agreement is the centerpiece of any Buy-Sell Planning.
A Buy-Sell Agreement is a legally binding document that spells out what will happen to a business when a specific triggering event occurs, such as the death or disability of a business owner or shareholder. Other events typically covered include the resignation, retirement or termination of a shareholder or owner.
The major benefit of a Buy-Sell Agreement is that it allows for the continuation of the business by providing for an agreed upon transition of the business. In addition to providing a ready market for the business, it can provide that the price for both buyer and seller is a fair one. The agreed upon price can, in many instances, set the value of the business for estate planning purposes.
While the Buy-Sell Agreement can provide the legal framework for the sale and transition of a business, it does not provide the cash needed to fund it. One of the most popular methods of funding a Buy-Sell Agreement is permanent life insurance. Based on current federal tax law, permanent life insurance has several tax advantages. The death benefit will be received tax-free, in most instances, and the cash value in the policy grows tax-deferred. The cash value provides a pool of money that can be accessed with tax efficiency to fund a buy-out. Other methods of funding a Buy-Sell include: term insurance, borrowed funds, a sinking fund, or an installment purchase.
The majority of Buy-Sell Agreements funded with life insurance are either Entity or Cross Purchase Agreements. Other methods include Trusteed Cross Purchase and Wait and See Agreements. For information that clearly explains the choices listed above, click here for a downloadable file.
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