Buy/Sell Insurance Planning

Does your business have more than one owner or shareholder? Does it have an agreement in place that addresses what happens if death or disability strikes?

You and your co-owners have worked incredibly hard to build your business into the success it is today. Part of running a successful business is being proactive and prepared for the unexpected.

What would happen if your business partner died, became disabled or incapacitated? What if he or she gets divorced? Or files for bankruptcy? What is the impact on your business?

How will you fund the buy-out of your departing partner’s interest in the business? Could they purchase your share of the business if something happened to you?

There are numerous issues to consider when structuring a buy-sell agreement and advanced planning is essential. Assisting our clients with the funding solutions and product recommendations is a core area of expertise at Integrated Financial Strategies.

  • A legally binding agreement between a business and its owners.
  • Stipulates/governs what happens if a business owner dies or leaves the business for other reasons (e.g., disability, illness, early retirement, divorce, misconduct/incarceration).
  • Establishes a formula or method for determining the fair market value of a business.
  • Explains in detail the obligations of the remaining business owners for buying out the disabled/deceased business owner’s interest in the business.
  • Ensures that the disabled owner/survivor of the deceased owner is promptly compensated for their interest in the business.
  • Includes dispute and conflict resolution mechanisms.
  • Does your business have a buy-sell agreement? Is it up to date? Has it been signed by all parties?
  • When was the last time you reviewed the buy-sell provisions of your agreement? Are they up to date? Do they reflect the current fair market value of your business?
  • How will the buy-sell provisions be funded?
  • Do the buy-sell provisions of your agreement contain clauses that deal with the disability of a shareholder? How long must someone be disabled before it triggers a buy-out of their interest in the business? How will this be funded?
  • Has there been a change in control of your business? If so, have the buy-sell provisions of your agreement been updated to reflect the change in control? How will they be funded?

Why insurance is the best way to fund a buy-sell agreement

Taking the time and thought to draft a buy-sell agreement is important. More importantly, for the buy-sell agreement to be effective, it is critical to have the funding that satisfies the terms of the agreement.  The common methods for funding a buy-sell agreement are insurance, installment payments, using existing profits, and borrowing funds.

Whether it is life insurance to fund the buy-out of a deceased owner’s interest in the business or disability insurance to fund the buy-out of a disabled owner, insurance is by far the least expensive way to fund a buy-sell agreement.

The cost is the annual insurance premium, and the proceeds received by the business from a life or disability insurance policy are tax-free.

  • Ensures the surviving owners retain full control of the business with minimal interruption.
  • Immediate tax-free inflow of cash to satisfy the terms and conditions of the buy-sell agreement to the departing/deceased shareholder.
  • Creation and utilization of a Capital Dividend Account (CDA) credit whereby the life insurance proceeds in excess of the policy’s adjusted cost basis flow tax-free to the shareholders of the corporation.
  • Avoids the costs associated with borrowing funds from a 3rd party institution whose vision for the business may not be consistent with the remaining owners.
  • Avoids using existing cash-flow and/or profits to buy-out the deceased/departing shareholder.
  • Immediate liquidity for the departing shareholder/family of the deceased shareholder at a time when it is needed most.
  • Guarantees a market/buyer for their interest in the business at a fair pre-determined price.
  • Peace of mind for the deceased or departing shareholder’s loved ones knowing that the funds they are entitled to will be there if tragedy strikes.
  • Avoids the risk of future financial losses incurred by the business.
  • Reduced risk of litigation to protect the interest of the departing/deceased shareholder.

Let us customize an insurance solution that protects your company’s future, while providing you, your family and your business partner(s) with peace of mind.

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We recommend that you involve your tax and legal team in the planning conversation. Items to consider include income-tax implications, corporate structure, ownership, and beneficiary designations, as well as family law considerations.

Mark has provided us with a high level of expertise on some complex life insurance & estate planning since 2005. He is an expert in his field, always exhibiting professionalism and transparency.

Dave & Dave – Zebra Paper Converters