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Buy Sell Insurance

Buy Sell Insurance

A Buy – Sell Agreement is a succession planning tool. It ensures the business is able to retain the stock of an owner should that owner pass away, become disabled, or leave the business.

A Buy – Sell Agreement requires appropriate levels of life insurance funding so the company can buy back a departing partner’s share of the business. Control of the company continues to reside with the remaining partner(s).

The Buy – Sell Agreement also addresses the individual family dynamics for each partner. A driving force for business owners is providing for their family today, and their children in the future. These familial demands are significant, and the financial rewards that covers family is usually tied up in the equity in the business.

Setting up well thought out Buy – Sell agreements, and funding those agreements with an adequately sized life insurance policy on each partner, provides security for the business and for the partners and their families. Simply put, it takes the uncertainty out of the future.

Per Doug McClure, CEO of Global Investment Strategies, one of the greatest vulnerabilities for a business are the owners themselves. The success of the partnership almost always depends on the relationship between and contributions of each partner. When partners cannot work together any longer, the business becomes very vulnerable. The investment and work up to that point could all be for naught.

As Doug McClure said: “Partners without a life insurance funded Buy – Sell agreement are a dream for lawyers and attorneys. There is nothing but confusion, contention, and lawsuits that result.”

There are three types of Buy / Sell Insurance.

1

Cross Purchase Plan

A “cross-purchase buy-sell agreement” is the most popular buy-sell life insurance structure for small companies with no more than four owners.

Entity Buy Sell

The second version is the “Entity Buy-Sell Agreement.”  This agreement requires the business to purchase the stock at a designated price from the deceased partner’s estate.

Trust Buy Sell

This buy-sell agreement uses a trust to hold the life insurance and the stock of the company. The trust is the owner of the stock with the partners as beneficiaries to their pro rata shares.

Cross Purchase Plan

A “cross-purchase buy-sell agreement” is the most popular buy-sell life insurance structure for small companies with no more than four owners. A cross-purchase agreement requires each owner to buy an individual policy on each of their partners. The amount of life insurance is equal to their respective share of the net worth of the business. Each owner will be beneficiary, payer, and owner of each policy purchased on the lives of the other business owners. It provides a clear outline of how the deceased owner’s heirs will sell their interest to the remaining owner(s) with the insurance proceeds. The Life Insurance is specifically the funding source to purchase the stock of the deceased partner. The Buy Sell Agreement entered into by the partners governs the price and purchase of the stock.

Entity Buy Sell

The second version is the “Entity Buy-Sell Agreement.” This agreement requires the business to purchase the stock at a designated price from the deceased partner’s estate. The Life insurance is owned by and paid by the business to fund the stock purchase. This protects the fundamental continuity of the business for the remaining owner(s) by buying out the deceased owner’s share from their heirs with life insurance proceeds rather than necessary working capital of the business.

Trust Buy Sell

This buy-sell agreement uses a trust to hold the life insurance and the stock of the company. The trust is the owner of the stock with the partners as beneficiaries to their pro rata shares. At the death of a partner the trust cashes in the death benefit, retires the stock of the deceased partner, paying off the estate of the deceased partner for the value of the stock. The trust document rather than a separate buy sell agreement governs the transaction. In each type of buy sell agreement the Life insurance is purchased to fund the buy-out of the deceased partner’s shares. Life insurance is purchased with nominal annual or more frequent premiums to provide the continuity of the business (many business’s do not have the liquidity to pay off deceased partners potentially causing problems for the business and the family of the diseased owner).

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