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Buy Sell Agreements
One common question we receive when discussing key person benefits is “What is a buy/sell agreement?” A buy/sell agreement, also known as a buyout agreement, is a contract funded by a life insurance policy that can help minimize the turmoil caused by the sudden departure, disability or death of a business owner or partner.
Understanding Buy/Sell Agreements
Types of Agreements
A buy and sell agreement (or buy-sell agreement) is a legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership. Buy-sell agreements often use life insurance policies to fund the potential buyout in the event of a partner’s death.
A buy and sell agreement may also be called a buyout agreement, a business will, or a business prenup.
Many business owners choose one of two buy/sell agreement life insurance plans. They include:
A cross purchase plan – A cross purchase agreement depends on each business owner buying a life insurance policy on each of the other owners. Then, when an owner dies, the remaining owners use the payout from the life insurance policy to buy the deceased owner’s share of the business.
An entity purchase, or stock redemption, plan – Each employee-owner enters into an agreement with the business to sell their interest in the business. As part of the agreement, the business buys life insurance policies on the lives of each owner. The business pays the premiums and therefore exists as the owner and beneficiary of the policy. When an employee-owner dies, that share of the company passes to the heirs of his or her estate. Then the business can use the policy’s death benefit to buy the interest from the estate.
What Are The Potential Benefits?
Why choose Richard S. Bernstein & Associates?
With so many options from which to choose, deciding on the life insurance policy that’s best for your needs can be a challenge. Our licensed professionals will provide you with a comprehensive needs analysis analyzing your needs, budget, and risk tolerance to determine the type of policy that’s right for you. Being in the insurance business since 1964, Richard S. Bernstein personally works to obtain the best underwriting offers for you with the best insurance carriers and will provide you with an array of options to meet your needs.
If you would like for one of our experienced life insurance advisors to examine your individual needs, offer our expert advice, and give you a quote, please fill out the box above to contact us today.
Potential business benefits of a buy/sell agreement
A buy/sell agreement gives employers peace of mind knowing that their business is in capable hands should they no longer be able or want to manage it. It also:
- Provides money to create a fair market value exchange
- Promotes equitable and orderly transfer of wealth, ownership and management
- May offer tax advantages
- Guarantees heirs a buyer for assets they may not know how to manage
- Provides heirs cash to pay estate debt, expenses and taxes
Potential benefits for business partners and employees
For employees, a buy/sell agreement provides a way to purchase a business they have a vested interest in but may not have the capital for. It also:
- Assures remaining owners that the deceased’s share of the business will not pass on to someone unsuitable
- Assures continuity for customers, creditors and employees
