Photo by Tiger Lily
We understand the complexities of buy-sell insurance policies and we are here to help you protect your business, your assets and your family. One of the main concerns business owners have is what will happen if one of the owners passes away, how it will affect the business, the other owners, and the heirs.
In addition, surviving owners want to ensure continuity of ownership and avoid having a large stake fall into the hands of inexperienced heirs. They also want to protect their personal assets and the company's financial well-being.
Furthermore, owners want to make sure their families are financially secure and are fairly compensated in case of their death.
All of these concerns can be addressed with a buy-sell agreement. This is a contract between business owners that, upon the death of one of the owners, requires the remaining owners or the company itself to purchase the deceased's interest in the business according to the agreement. A deceased individual's heirs are also required to comply by selling the inherited interest at the previously agreed price.
FUNDING THE BUY-SELL AGREEMENT
There are a variety of options for funding a buy-sell agreement, but some are more risky than others. Owners may choose to save money and pay cash now or to take out a loan against the company's assets to purchase the shares of a deceased owner. Financially, both scenarios can pose a risk, both to the surviving owners and to the company itself.
Life insurance is the smartest way to fund buy-sell agreements. As a result, funds are available immediately when a death occurs, and the death benefit proceeds are generally tax-free. Also, the funds used to purchase the deceased's share are purchased for pennies on the dollar, and the premiums will likely be significantly less than the interest paid on the loan.
Types of buy-sell life insurance options include the following:
Entity Purchase Plan: With this type of agreement, also known as a stock redemption plan, the company purchases life insurance policies on each owner and names itself as the beneficiary. In the event of a business owner's death, the company is entitled to the proceeds of his or her life insurance policy and uses said proceeds to purchase the deceased's business interest, while the heirs are entitled to an agreed-upon payment for their interest in the business.
Cross Purchase Plans: An agreement between the owners is the basis of this type of plan. Every owner purchases a life insurance policy on the other owners, in which they will be named the beneficiaries. Each surviving owner receives income tax-free life insurance proceeds and uses those proceeds to purchase the deceased's business interests, while the heirs receive an agreed-upon payment for their ownership interest also.
As you see, there is a lot that can go into the proper succession plan of a business and there are various ways to plan for it. If you have further questions about how these life insurance plans work, please feel free to call or message us today.