Buy-Sell Funding

In order to guarantee a buyer for the interest in a business, business owners should consider a lifetime agreement as to how to dispose of the business.

An insured Buy-Sell agreement is often recommended by business-succession specialists to:

• Ensure the buy-sell arrangement is well-funded, and
• Guarantee there will be money when the buy-sell event is triggered.

Owners usually choose between two basic types of buy-sell agreements:

1. Entity Plan
   Partners enter into an agreement with the partnership that owns, pays the premium payments, and is the beneficiary of the policies. When a partner dies, his/her interest is purchased from his/her estate by the partnership at the agreement price, and the interest is then divided among the surviving partners in proportion to their owned interest.


2. Cross-Purchase Plan
   Each owner of the corporation purchases an insurance policy on the other shareholders. The purchaser is both the owner and the beneficiary of the policies. Upon the death of a shareholder, the other shareholders are able to use the life insurance proceeds to purchase the deceased owner’s shares.

Related Information

Advantages of Buy-Sell Agreements:

• Guarantees a buyer for an asset, which probably will not pay dividends to one's heirs. Establishes a value for federal estate-tax purposes, which is binding on the IRS.
• Spells out the terms of payment and is easily funded with life insurance and disability insurance, if desirable.
• Provides a smooth transition of complete control and ownership to those who keep the business going.