A buy-sell agreement is a contract that outlines what will happen to your business interest at retirement, death, or another triggering event. When your buy-sell agreement is funded with life insurance, the policy owner (usually a co-owner of the business or the business itself) uses the policy proceeds to buy your business interest at your death. If you retire, the cash value of the life insurance policy can provide a down payment and help fund the buy-out of your share of the business.
Advantages of a Buy-Sell Agreement
A well-constructed buy-sell agreement anticipates how the value of your business may change over time and provides for appropriate adjustments in the amount of the buy-out price. The life insurance policy can be designed to vary with the buy-out price so you maintain sufficient coverage. When it’s time to leave your business, a properly designed buy-sell agreement can:
- Help create a market for your business interest.
- Establish the purchase price of your business interest and possibly set a value for estate tax purposes, while you are living.
- Maintain the “closeness” of the business by restricting the transfer of your business interest to co-owners, family members or key employees who you choose.
- Help your family by providing liquidity for the payment of estate taxes and other estate settlement costs.
- Reduce the business’ credit risk by providing a business continuation plan.
- Help assure that the business you created continues to provide for your family and your employees.