The Life Insurance Funded Buy-Sell Agreement

There are various forms of business agreements available for disposing of a business interest at death. These agreements, typically referred to as buy-sell agreements, are an important planning technique for business owners. The particular type of buy-sell agreement used will depend upon many factors, such as the type of business operation involved, the number of owners, and the particular disposition to be made of the interest.

• A partner can contract with co-partners to sell his or her partnership interest to them at death through a cross-purchase plan. On the other hand, the partner can contract with the partnership to purchase his or her interest through an entity-purchase agreement.
• A close corporation stockholder can contract with co-shareholders to sell his or her stock to them at death through a cross-purchase agreement. The close corporation stockholder also can contract with the corporation to purchase his or her stock at death through a stock redemption agreement.

The Insured Buy-Sell Agreement

Life insurance is the method by which a “sinking fund” will be sure to furnish the required cash to the surviving co-owners, in full, automatically at the death of a co-owner, regardless of whether death occurs today, a year from today or many years from now.

Life insurance will assure that the same death that puts the agreement into effect will provide the cash with which to carry out its terms and make possible the purchase of the deceased’s interest. Here is the best solution to the problem of closely held business management continuity in the event of death. Any other plan is in large part makeshift or a substitute, because no other plan carries with it equal assurance that it will be completed.

Under the insured buy-sell plan, the co-owners agree among themselves and enter into a contract to purchase the interest of any member who dies, and each co-owner contracts for the sale of his or her interest to the surviving co-owners or to the business entity itself upon his or her death. The arrangement is a definite and binding executory contract to buy and sell.

A price or method of determining the purchase price is set out in the agreement. Then, to avoid the difficulties inherent in securing the funds with which to make the purchase, each participant’s life is insured in an amount equal to the value of his or her interest. At the death of a co-owner, the surviving owners get the business interest of the deceased using the insurance proceeds to pay the estate of the deceased business owner, which gets cash in exchange for the business interest.

Robert Adler, Esq. is an attorney who focuses his practice on estate planning, wills, trusts and estates. He can be reached at 212-843-4059 or 646-946-8327.