 A formal buy sell agreement is between owners of a business to determine how the ownership of the business shall be disposed of upon the death or other circumstances of exit of one of the owners. The owners commonly use life insurance to fund the value. With two business owners, a cross purchase plan is the preferred method of ownership of the life insurance. This is where partner A owns a policy the life of on Partner B and vice versa. These policies are individually owned, and can be paid for from company money. The death benefits pass income tax free to the surviving business owner; therefore it is best that the policies be owned individually instead of being business owned. If business owned, then normally a stock redemption type of plan is used rather than a cross purchase plan. One word of warning – unless owned in a life insurance trust, the death benefit from the life insurance policy on Partner B will be included in the size of the estate of Partner A for estate tax purposes – so Include your Estate Planner in your plans when setting up and funding your Buy Sell agreement. Two important aspects of this type of arrangement are necessary. First nobody wants to fight with a deceased partners spouse or family member. A Buy Sell Agreement provides a predetermined value or, or valuation formula that the parties agreed to. Second and even more important is that the Agreement sets the value for IRS purposes. If the IRS were to come in and audit an estate and they allege that the business was worth $10 million but there was a funded buy-sell agreement for $7million, it would be difficult for the IRS to prevail. Setting a value for the business and an orderly transition and transfer of ownership is needed when a partner dies. Using life insurance to fund the transfer provides the immediate cash for the surviving partner to purchase the ownership interest from the deceased shareholders estate. Paul Berlin is a standout in the field of independent life insurance professionals, with over 28 years of experience. During the course of his career he has been an industry leading producer for several life insurance carriers. He works with clients to utilize all types of life insurance planning from corporate deferred compensation issues to individuals using life insurance for wealth preservation and other creative uses. Mr. Berlin has offices in Chicago, Illinois. He can be reached at 312-664-5577 or Exec.planning@prodigy.net |
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