Buy Sell Agreements – Protecting Your Interests From the Four Ds
Buy sell agreements are common estate planning tools for people with business partners. They ensure the continuity of the business in the event of the death, disability, retirement or withdrawal of one or more of the principles.
If you run a successful company with a business partner, you should consider executing a buy sell agreement to protect your own interests, as well as those of your family. Here are some scenarios to consider:
▪ When a principle dies, will that person’s stock be repurchased, or can he or she leave that stock to a person of his or her choice? To assure the continuity of the business, it is usually best to repurchase the stock.
▪ Will the repurchase, if any, be done by the corporation or the other shareholders? This involves business and tax issues which will need to be discussed one on one with your attorney, since individual situations vary.
▪ A proper repurchase arrangement requires the use of life insurance, which also needs to be discussed in person to address your unique needs. For example, in a corporate redemption situation, if there is a $500,000 purchase price, the corporation will likely not have sufficient assets to pay that purchase price. Generally, life insurance is used for these purposes. (Be sure to read my previous blog, “Your Life Insurance Review” to understand why it’s important to keep your policies up to date.)
▪ If a principle becomes disabled, will s/he continue to receive salary and benefits? If yes, for how long? That person cannot receive salary payments indefinitely, because at some point those payments will be deemed to be dividends, which is subject to double tax.
▪ Will a disabled shareholder’s stock be repurchased? If so, we will have to discuss how the payments will be made, since life insurance will not be available for this purpose.
▪ Some of these issues can be addressed in employment agreements.
3. Departure or Retirement
▪ Will a shareholder’s stock be repurchased in the event s/he retires or withdraws? Typically, this does not happen because it places an economic drain on the corporation.
▪ If your partner separates or divorces, will that put your interests in the company at risk? A buy sell agreement can protect you or your partner from unforeseen events like this.
If you co-own a business, it might be time for you to consider the future of your company and maintaining financial interests for yourself and your family. Buy sell agreements are one of the best ways to protect those interests from unforeseen events.