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.
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.
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