| The first question most people have is what in the | | | | the signing of the buy-sell agreement. The proceeds |
| world is buy sell life insurance? In closely held | | | | are paid out to the other owners who then use the |
| businesses the death of one owner can cause a | | | | funds to purchase or buy out the deceased owners |
| plethora of inconvenient issues to arise within the | | | | shares. There are no income tax consequences to the |
| business. Depending on the deceased owners' estate | | | | deceased's family as a result of the "sale", nor are the |
| planning, the remaining business partners could face a | | | | proceeds subject to corporate creditor claims or the |
| number of legal and financial hurdles. | | | | corporate alternative minimum tax. As a result of the |
| A buy-sell agreement is a contract among business | | | | life insurance proceeds there is a lump sum of cash |
| owners, where upon the death of one of the owners, | | | | available to buy out or "fund" the agreement at the |
| the remaining owners are required to purchase the | | | | time of death, without having to go thru the probate |
| deceased's interest via the terms of the contract | | | | period required by most states. |
| (buy-sell agreement) and the deceased's survivors or | | | | There are some drawbacks to the life insurance |
| heirs are required to comply by selling their inherited | | | | buy-sell agreement, most centering around the |
| interest at the pre-determined price. | | | | premiums paid into the life insurance policies during the |
| The buy-sell life insurance method is becoming more | | | | lives of the owners. Since insurance premiums are not |
| and more attractive to business owners because it | | | | paid with pre-tax dollars, they are usually not tax |
| avoids the question of how family members are to | | | | deductible. Depending on the age and health of the |
| ensure they are receiving a fair price for their inherited | | | | owners, some of them might not be insurable. The |
| share in the business. It also avoids the corporation | | | | uninsurable owners would really have no incentive to |
| having to produce a large amount of cash to redeem | | | | participate in a buy-sell agreement, which would result |
| the heirs' interest in the corporation, and it avoids | | | | in an inequitable situation in regards to stock |
| corporations having to deal with unwanted and | | | | redemption agreements. Also, since interests and ages |
| potentially inexperienced partners (such as the spouse | | | | of the owners of the corporation could vary widely, |
| of the deceased). | | | | there is a chance that the corporation will have to pay |
| Cross Purchase vs. Stock Redemption | | | | higher premiums for older owners and for those with |
| There are two basic formations of buy-sell | | | | smaller interest to pay a disproportionate share of |
| agreements. The first is a cross purchase agreement. | | | | premiums. |
| The next is a stock redemption agreement. In a cross | | | | There are other ways to fund buy sell agreements, |
| purchase agreement each owner of the corporation | | | | each with their own set of advantages and |
| will purchase a life insurance policy on the other | | | | disadvantages. However, depending on the size of |
| owners, and will in turn be named the beneficiary of | | | | your corporation (or partnership or LLC), age and |
| the policy. In a stock redemption agreement the | | | | interests of its owners the life insurance buy sell |
| corporation purchases the life insurance policies. In | | | | agreement is an excellent way to ensure that your |
| each instance when an owner dies either the | | | | family and co-owner have the easiest transition of |
| corporation or the other owners will use the proceeds | | | | your shares in the event of death. |
| of the life insurance policies to redeem the deceased | | | | Buy Sell Agreement Life Insurance Quotes |
| owners' interest in the corporation. | | | | Be sure that you shop around and compare life |
| Pros and Cons Of Buy Sell Agreements | | | | insurance quotes from multiple companies before |
| These agreements are financially advantageous to | | | | purchasing a policy. A little bit of research spent early |
| both the corporation and the individuals that stand to | | | | on will be well worth it when it comes time to draw up |
| inherit interest in the corporation. The fair market value | | | | the paperwork. |
| of the owners' shares are agreed upon at the time of | | | | |