A buy-sell agreement needs to be written properly in order to ensure that it’s effective for invested parties. There are some specific aspects that should be considered in the planning of any buy-sell agreement. Here are some of the basic stipulations:
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- The commitment of involved parties. The obligations of each party should be outlined clearly, leaving no room for questions
- The purpose of the arrangement should also be specified
- A formula explaining the purchase price of the business interest should also be included, like a value for the selling/buying price for the business. Furthermore, how this should be funded is also explained.
- Any transfer restrictions should also be included, which can prevent the owners from transferring interest in the business while any other parties to the agreement are still alive.
Bear in mind that there are tax considerations for funding a buy-sell agreement with life insurance, such as:
- Premiums used to fund the agreement are generally not tax deductible
- There’s no gift tax that happens on the buy-sell agreement execution
- In a cross purchase agreement, the cash value of the policies that are owned by the decedent can be factored into the decedent’s estate.
- Death proceeds are paid out income-tax free, no matter who actually owns the policy.
If you’re planning on structuring such an agreement, you might use an entity purchase agreement, a cross purchase agreement, or a hybrid agreement. To learn what will work best in your situation, send us an email at info@lawesq.net or contact us via phone at 732-521-9455.