Buy/Sell Agreements

Buy/Sell agreements are designed to protect owners of a business in many ways. When there is a death to one of the owners, many problems arise;  1) The surviving owner may not be able to afford buying the stock from the estate;  2) Because of #1, the beneficiaries may not be able to receive payment for the deceased ownership’s value;  3) The survivor may feel the need to sell to someone outside of the current ownership.   These agreements can also be very useful in planning for other situations as well, including disability, divorce, and retirement.

Funding of such an agreement is usually accomplished by purchasing life insurance for the owners. The life insurance proceeds upon one’s death provides the money needed to buy out the remaining or surviving owners.

In a cross-purchase agreement (which would typically be the preferred method), each owner buys life insurance policies on the other owners. If an owner dies, the other owners use the life insurance proceeds to buy the business interest from the deceased owner’s estate. This way, the estate receives a fair value payment for the value of their stock ownership, and, the surviving owners are able to continue the company without the complications of bringing in new owners or without bringing in spouses or children of the deceased owner.