There are many benefits that a buy-sell agreement can provide for you and your company. Here’s a quick overview on the basics of a buy-sell agreement along with the types of available plans.
The Basics of a Buy-sell Agreement
A buy-sell agreement is a contract among business owners which, upon the death of one of the owners, requires the remaining owners or the company itself to purchase the deceased’s interest in the company according to the agreed upon terms of the contract. In addition, the deceased’s heirs are required to comply by selling their inherited interest at the previously agreed upon price.
Although there are other options for funding a buy-sell agreement, the smartest method for doing so is through life insurance. This ensures that funds are immediately available when a death occurs; plus, death benefit proceeds are generally income-tax free. In addition, the funds used to buy the deceased’s share are purchased for pennies on the dollar and the premiums will likely be significantly lower than the cost of repaying loan interest.
Types of Buy-Sell Life Insurance Plans
There are two main types of buy-sell life insurance plans: cross purchase plans and entity plans.
Cross Purchase Plans
Under this type of plan, the owners enter into an agreement with each other. Each owner purchases a life insurance policy on the other owners, and will be named the beneficiary of the policy. Upon the death of an owner, each surviving owner receives life insurance proceeds income-tax free, heirs receive an agreed upon payment for their business interest, and the surviving owners use the proceeds from the life insurance policy to redeem the deceased owner’s interest in the company.
Entity Plans
In this type of agreement, also known as a stock redemption plan, the company purchases life insurance policies on each owner, with the company itself as the beneficiary. When an owner dies, the company receives the life insurance proceeds and uses said proceeds to purchase the deceased’s business interest, while the heirs receive an agreed-upon payment for their business interest.
Benefits of a Buy-Sell Agreement
- Establishing a valuation of a deceased owner’s interest in the business for estate tax purposes
- Establishing a mutually agreeable price and terms
- Making sure the family of the deceased owner receives cash instead of unmarketable stock
What LG Planning Group Can Do for Your Organization
Contact Matt Glazer or call 631-589-6960 today about planning for your company’s and family’s future. Learn more about the protection and peace of mind that a buy-sell agreement can provide for you and your company. We’re here to help.
Disclaimer: This article is provided by LG Planning Group for informational purposes only. The information provided herein is not intended to be exhaustive, nor should it be construed as advice regarding coverage. Eligibility for coverage is not guaranteed and all coverages are limited to the terms and conditions contained in the applicable policy. © 2009, 2013, 2016 Zywave, Inc. All rights reserved.
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