Buy-Sell Agreements
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Buy-sell agreements are contracts between two or more business owners that are used to preserve the control and value of a business at the death, disability or retirement of an owner. The agreements provide that the estate of an owner who dies will be paid a fair value for his/her interest, and that the surviving owners will maintain control and ownership of the business. Life insurance on the owners can be a source of tax-free money to fund these arrangements.
In all of the buy-sell alternatives, provisions in the agreement should address all of the following as triggering events: death, disability, divorce, bankruptcy and, in a professional corporation, the loss of a professional license.
One of the major problems with all buy-sell arrangements is the source of funds for either the shareholders or the corporation to buy the stock from the deceased shareholder. Life insurance is the typical source of these funds.
In a “C” corporation, the receipt of insurance proceeds to be used to redeem a shareholder’s stock may cause the corporation to be subject to alternative minimum tax. As the value of the corporation increases, the insurance death benefits must be reviewed periodically to determine if additional insurance is needed.
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