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A chief concern among business owners is what will happen upon the death of one of the owners. They wonder how it will affect the business, the other owners and the heirs of the deceased owner. Surviving owners want to ensure the continuity of ownership and not risk having a large share of ownership fall into the hands of potentially inexperienced heirs of the deceased. In addition, they want to protect themselves and the company financially. On a personal level, owners want to also ensure that their families are financially secure and compensated fairly if something happens to them.

What is a Buy-Sell Agreement?

A buy-sell agreement can address all of these concerns. It is a contract among business owners that, 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.

The best way to fund a buy-sell agreement 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.

Advantages of a Life Insurance Funded Buy-Sell Agreement

  • Establishes a valuation of a deceased owner’s interest in the business for estate tax purposes.
  • Establishes a mutually agreeable price and terms to reduce potential future litigation or friction.
  • It helps facilitate a smooth transition of management.
  • Ensures that the family of the deceased receives cash instead of unmarketable stock.
  • Protects the company’s liquidity needs at a potentially vulnerable time.

Types of Buy-Sell Life Insurance Plans

Cross-Purchase Plans

  • Each owner purchases a life insurance policy on the other owners and is a named beneficiary of the policy.
  • Upon the death of an owner, each surviving owner receives the life insurance proceeds income tax-free and uses the proceeds to purchase the deceased’s business interest.
  • Heirs of the deceased receive an agreed-upon payment for their inherited business interest.

Entity Plans

  • The company purchases life insurance policies on each owner, naming itself as sole beneficiary.
  • Upon the death of an owner, the company receives the life insurance proceeds and uses said proceeds to purchase the deceased’s business interest.
  • Heirs of the deceased receive an agreed-upon payment for their inherited business interest.

Reliance Insurance Agencies, Ltd. understands the complexities of buy-sell insurance policies. We are here to help you protect your business, your assets and your family. Contact our group and employee benefits advisors today for more information.

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