Every business needs a continuation plan that spells out how the business will survive after an owner’s retirement or death. For a sole proprietorship, the plan should name the successor who will run the business. For a partnership or S Corp., the plan should include a buy-sell agreement. In a buy-sell agreement, two or more partners give each other the right to purchase the interest of any owner or partner who dies, retires or becomes disabled and unable to work. A sole proprietorship might need a buy-sell agreement as well, to ensure that any heirs not involved in running the business get their share of the business’s value.
You can structure a buy-sell agreement so remaining owners can buy the interests of withdrawing partners (a cross-purchase arrangement), or the business itself can buy them (an entity purchase or stock retirement arrangement) using business funds. Cross-purchase agreements have become the preferred method of buy-sells, due to tax considerations. To execute a buy-sell agreement, you’ll need to have funding available shortly after the business owner’s retirement or death.
Life Insurance Offers Funding Advantages
Life insurance offers significant advantages over other forms of funding. First, when a business buys a policy on its owner and pays premiums with after-tax dollars, the benefit is tax-free, which maximizes the funds available for buyouts. Second, life insurance proceeds become available shortly after the death of an owner – unlike other, less liquid assets.
To determine how much life insurance you’ll need to fund your buy-sell agreement, you’ll need to determine the value of your business. An accountant or financial planner can help. For complex cases, though, a certified valuation appraiser can provide a more accurate value. After you determine the value of the business, the business can buy a life insurance policy on the owner(s) or partner(s) for the amount survivors will need to buy their interest.
I can help you secure life insurance for buy-sell and other business continuity needs.
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