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In our last blog post, we discussed how does the buy-sell agreement works with two different approaches. Now we will discuss the funding of buy-sell agreements with life insurance.
Life insurance is an ideal funding source for a buy-sell strategy that is triggered by the death of a business partner. It is often the most affordable option when compared to a bank loan, a sinking fund, or an installment sale, and the death benefit provides liquidity precisely when the need arises: the death of a business owner. Further, a permanent life insurance policy can accumulate cash value that can help fund a buy-out strategy upon retirement. Next, we will discuss the benefits of buy-sell agreements. In our last blog post, we introduced the idea of buy-sell agreement for business owners. Now we will discuss how does a buy-sell agreement work.
First, an attorney should be used to draft a buy-sell agreement, which is signed by both the business owner and the projected buyer. A buy-sell agreement is most commonly structured as either a cross-purchase or an entity-purchase arrangement. Cross-purchase Approach In the cross-purchase approach, individual business owners purchase life insurance policies on the lives of all other business business owners. It generally works best when there are three or fewer business owners of relatively equal age and health status, all of whom can be depended upon to make timely premium payments. A cross-purchase approach also provides the most favorable tax basis for the purchasing owners. Entity-purchase Approach In the entity-purchase approach, the business purchases policies insuring the lives of each business owner. This strategy is simpler for businesses with greater than three owners, and it equalizes premiums paid for individuals of varying ages and health classes. Although premiums are not tax-deductible, the death proceeds are received income tax free. In our next blog post, we will discuss the funding of buy-sell agreements. Q. What is a buy-sell agreement and why it matters to me as a small business owner?
A. As a successful business owner, a funded exit strategy can help you harvest the value of your business when you leave the company. A buy-sell agreement selects a buyer, the purchase price and a funding source for the future sale of your business. It can be triggered at retirement or in the event of your death or disability, and it helps to ensure that you and your family will be financially secure. In next blog post, we will discuss how does a buy-sell agreement work. Q. I own a small business, how should I approach the exit plan?
A. According to a LIMRA survey, 76% of small business owners understand the importance of having a business succession plan; yet only 35% actually have a plan in place. To get started, every business owner should ask the following 3 questions: 1. What's my exit strategy?
2. Is it in writing?
3. How is it funded?
If you are a small business owner and want to have a free review of your trusts, buy-sell agreements and other advanced planning materials, please contact us, we will find an expert to do it for you at no cost. Q. How to find my spouse's pension information? Where to find help if I have a question about a retirement plan?
A. If you want to track down a missing pension, you can use the "Find an Unclaimed Pension" tool at PBGC.gov, you can search by last name, company or state. You can visit PensionHelp.org if you have a question about or a problem with your retirement plan. |
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