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Businesses with more than one owner benefit from having multiple viewpoints and varying skill sets. However, they also face serious risks of uncertainty and conflict if one of the owners suddenly departs or undergoes a major life change. A carefully crafted buy-sell agreement can guard against these risks \u2014 if it\u2019s securely funded.<\/p>\n
Transfer guidelines<\/strong><\/p>\n A \u201cbuy-sell\u201d (as it\u2019s often called) is a legally enforceable contract among a company\u2019s owners that sets guidelines for transferring ownership interests. It gives the remaining owners or the business itself the right \u2014 or, in some cases, the responsibility \u2014 to buy an exiting owner\u2019s interest if a \u201ctriggering event\u201d occurs. Such events may include an owner\u2019s death, disability, divorce, retirement, voluntary departure, and loss of professional license or certification.<\/p>\n Essentially, the buy-sell creates a market for a withdrawing owner\u2019s interest. It also defines how the price of an ownership interest will be determined, including identifying a valuation method and standard of value. By outlining when and to whom interests can be sold \u2014 and for how much \u2014 the agreement ultimately helps prevent conflicts among remaining owners or with the withdrawing owner\u2019s family.<\/p>\n Popular choice<\/strong><\/p>\n When a triggering event occurs, a substantial amount of money is typically needed to buy the departing owner\u2019s interests. So, it\u2019s critical to properly fund a buy-sell.<\/p>\n One popular choice is life insurance. Although such coverage might seem useful only to provide liquidity in the event of an owner\u2019s death, it\u2019s not limited to such situations.<\/p>\n The right policy, sometimes combined with riders or other types of coverage, can help ensure that departing owners or their beneficiaries efficiently receive the agreed-upon price for ownership interests following eligible triggering events. Meanwhile, it can ease the strain on the company\u2019s cash flow and reduce the likelihood that the business will have to sell assets to fund an ownership interest buyout.<\/p>\n Various structures<\/strong><\/p>\n Buy-sells can be structured to use life insurance in various ways. One option is a cross-purchase agreement, where each owner takes out a policy on each of the other owners.<\/p>\n For example, let\u2019s say you buy coverage for your business partner. If that individual dies, triggering the buy-sell, you\u2019ll collect the death benefit and use it to buy the ownership interest from your partner\u2019s estate.<\/p>\n Assuming it\u2019s large enough, the policy should guarantee you\u2019ll have the funding to fulfill your obligations under the agreement. Other benefits include:<\/p>\n On the downside, a cross-purchase agreement can be cumbersome if there are more than a few owners because of the number of policies required. It can also be unfair if there\u2019s a significant disparity in owners\u2019 ages or health, causing the policy premiums to vary substantially.<\/p>\n One alternative is establishing a trust or separate partnership to buy a policy on each owner. If an owner dies, the trust or partnership collects the death benefits on behalf of the remaining owners and pays each one\u2019s share of the ownership interest buyout.<\/p>\n Another option is a redemption agreement. Under this approach, the business \u2014 not the individual owners \u2014 buys a policy on each owner\u2019s life. The company holds the insurance and receives the proceeds following a qualifying triggering event, which it then uses to buy a departing owner\u2019s interest.<\/p>\n A disadvantage of a redemption agreement is that the remaining owners won\u2019t receive a step-up in basis when the company buys the departing owner\u2019s interest. This can result in higher capital gains\u00a0taxes.<\/p>\n Additionally, in the 2024 case of Connelly v. United States<\/em>, the U.S. Supreme Court held that the value of corporate-owned life insurance used to meet a redemption agreement should be included in the value of a deceased owner\u2019s business interest for federal estate tax purposes. And that doesn\u2019t include any offsetting reduction for the company\u2019s obligation to redeem the deceased owner\u2019s interest.<\/p>\n The ruling may have adverse consequences for estates subject to the federal estate tax. Under current law, the unified federal estate and gift tax exemption is $13.99\u00a0million for 2025 and $15\u00a0million for 2026.<\/p>\n Bottom line<\/strong><\/p>\n The bottom line is, if not properly funded, a buy-sell agreement won\u2019t likely benefit anyone. Work with your attorney to create and occasionally review yours. Meanwhile, we can help you choose an optimal funding strategy and advise you on the tax implications.<\/p>\n \u00a9 2025<\/em><\/p>\n <\/body> Businesses with more than one owner benefit from having multiple viewpoints and varying skill sets. However, they also face serious risks of uncertainty and conflict if one of the owners suddenly departs or undergoes a major life change. A carefully crafted buy-sell agreement can guard against these risks \u2014 if it\u2019s securely funded. Transfer guidelines […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,14,10],"tags":[8,11,12],"class_list":["post-17387","post","type-post","status-publish","format-standard","hentry","category-articles","category-business","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17387","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=17387"}],"version-history":[{"count":1,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17387\/revisions"}],"predecessor-version":[{"id":17388,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/17387\/revisions\/17388"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=17387"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=17387"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=17387"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}\n
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