Buy/Sell Agreement
A Buy-Sell Agreement is legally binding agreement between owners of a business to have the capability of purchasing the other partner’s business shares and interests in the event of death or becoming incapacitated. Funding the buy-sell with a life Insurance policy can be used to ensure the availability of funds which would then be used for the buyout of deceased partner’s shares.
Who should have a Buy/Sell Agreement
If you are a sole business owner or have one or more partners, a buy/sell agreement can provide confidence knowing that if a pre-mature death or disability occurred, the business would have a clear direction on what was to happen and how. The business could continue to operate without interruption. For business owners, anticipate that certain situations such as incapacitation, divorce, bankruptcy, retirement, or death can happen anytime. These situations might put the business’ stability at risk, exposing it to the possibility of liquidity problems, ownership disputes, and eventually, failure to operate.
There are 3 ways to fund an agreement
- From profits of business
- Create a side cash account
- Use life insurance
Why use life insurance as a funding mechanism for the agreement
- Availability of lump sum cash
- The proceeds are generally tax-free, or be subjected for alternative minimum tax for C Corporations.
- Immediate payment of proceeds after death, to ensure the agreement is carried out efficiently
- Depending on the policy, the funds can be used to purchase business interests of the owner following retirement or disability
As a business owner, you want to prepare for whatever situation that may arise. Having a funded Buy-Sell Agreement can help answer the question, “How well are you planned and how can you tell”. Call Innovative Financial Group for a complimentary conversation to ensure you have planned for what is important to you.