Estate Plan Funding and Buy - Sell Agreements

How to preserve your life's work

You've spent a lifetime building your business. Take a moment to make sure than your hard work will survive the death of you or one of your partners.

As the owner of a closely-held business, much of your wealth is probably tied up in the business. While returning earned income back into the business helps finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family members also may encounter liabilities that become payable upon your death. They may also face the potential of decreased business earnings, due to your absence.

There are ways to overcome these liquidity problems. Business-oriented planning tools can help reduce estate taxes and make the best use of the cash available. The most common business estate-planning tools are buy-sell agreements. Business-owned life insurance can be used to fund each of this planning method.

Buy-Sell Agreements

Buy-sell agreements can establish the value of your business for estate-tax purposes and improve your estate's liquidity by assuring a ready market for your business upon your death. These agreements also protect business partners from sharing ownership with a deceased stockholder's family.

There are two main forms of buy-sell agreements: cross-purchase and stock redemption. In an insurance-funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner's stock from his or her estate.*

In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. Here the business is the owner and beneficiary of life insurance policies on each shareholder. A partnership looking for a business continuation plan may use a similar arrangement called an entity purchase.

A buy-sell agreement that is funded with life insurance will benefit:

  • Your Family:
    • Prevents conflict with surviving owners
    • Ensures that your family receives a fair price for your business
    • May set the value of your business for estate-tax purposes*
    • Provides needed cash
  • Your Business:
    • Keeps new and/or unwanted owners out of the business
    • Prevents disputes
    • Ensures continuity and orderly transfer of ownership
    • May provide tax-free cash to purchase stock

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