|
|
|
Wednesday, March 10, 2010
|
|
Advanced Life Insurance
|
 |
Call us at (800) 940-3002
|
|
|
|
 |
How does a buy/sell agreement funded by life insurance work?
|
|
|
|
|
|
|
|
DISCLAIMER: The purpose of this information is to provide general information which
is subject to change and is specific to state law.
ReliaQuote is not providing legal advice. If you have a specific legal issue
or accounting issue, you should consult with a lawyer who is licensed to practice
law in your jurisdiction or a certified public accountant familiar with tax regulations
in your jurisdiction. |
|
|
|
|
|
|
|
Buy/sell agreements may be set up in conjunction with Sole Proprietorships, Partnerships
and Corporations. The method for each is a little different. Below you will find
a general description of the options available for each type of business.
Sole Proprietorship
If a sole proprietor has a key employee
that has the desire to purchase the business in the event of the sole proprietors
death, a buy/sell agreement can facilitate the key employee's purchase of the deceased's
business. The sole proprietor and the key employee would enter into a buy/sell agreement,
and the key employee would purchase a life insurance policy on the life of the sole
proprietor. Pursuant to the buy/sell agreement, upon the death of the sole proprietor,
the key employee uses the death benefit to purchase the sole proprietors business
from his estate.
Partnership
Cross-Purchase Method
The Cross Purchase Method of entering into a buy/sell agreement works best if there
are a small group of partners (preferably two). The partners enter into a buy/sell
agreement and each partner buys a life insurance policy on each of the other partners
lives. Pursuant to the agreement, upon the death of one of the partners, the surviving
partners use the death benefit from the above-mentioned policies to buy the deceased
partner's business interest from his or her estate. The surviving partners then
own all of the partnership while the deceased partners estate receives the funds
from the sale of the deceased partners share of the partnership.
Entity Method
The Entity Method of entering into a buy/sell agreement offers the advantage of
simplicity over the Cross-Purchase Method if there are more than two partners or
if there is a likelihood of more partners joining the business later. In this scenario,
the partnership and each partner enter into a buy/sell agreement. The partnership
buys a life insurance policy on each of the partners lives. Pursuant to the buy/sell
agreement, upon the death of one of the partners, the partnership uses the death
benefit from the above-mentioned policy to purchase the deceased partners business
interest from his or her estate. The surviving partners then own all of the partnership
while the deceased partners estate receives the funds from the sale of the deceased
partners share of the partnership.
Corporation
Cross-Purchase Method
The Cross-Purchase Method of entering into a buy/sell agreement works best if there
are a small group of shareholders (preferably two). The shareholders enter into
a buy/sell agreement and each shareholder buys a life insurance policy on each of
the other shareholders lives. Pursuant to the buy/sell agreement, upon the death
of one of the shareholders, the surviving shareholders use the death benefit from
the above-mentioned policies to buy the deceaseds shareholders business interest
from his or her estate. The surviving shareholders will own all of the outstanding
corporate stock while the deceased shareholders estate receives the funds from the
sale of the deceased shareholders stocks.
Stock Redemption Method
The Stock Redemption Method of entering into a buy/sell agreement offers the advantage
of simplicity over the Cross-Purchase Method if the corporation has more than two
shareholders or if there is a likelihood that additional shareholders will join
the business later. In this scenario, the corporation and each shareholder enter
into a buy/sell agreement, and the corporation buys a life insurance policy on each
of the shareholders lives. Pursuant to the buy/sell agreement, upon the death of
one of the shareholders, the corporation uses the death benefit from the above-mentioned
policy to purchase the deceaseds shareholders business interest from his or her
estate. The surviving shareholders then own all the outstanding corporate stock
while the deceased shareholders estate receives the funds from the sale of the deceased
shareholders stock
|
|
|
|
|
|
|
|
 |
|
|
