BUY SELL AGREEMENT
Fund a Buy Sell Agreement
With Life Insurance
Buy Sell Agreements
Building a successful business is not an easy task. It is a process that requires a lot of hard work and patience. While business partners always believe that they will stay together in business forever, but this is not always the case. In a business, things can go wrong that will directly impact the owners and their families. There are various situations that can impact the success and continuity of your business and should be given serious consideration. Your businesses could be adversely affected with the death, disability, retirement disagreement, divorce, bankruptcy, and criminal convictions of any of the partners or owners. If you are a business partner, shareholder or a co-owner in a corporation, you must get a plan in place just in case one of you becomes disabled or passes away prematurely. If your business loses an owner, the remaining owners or partners must decide how the business will continue. If such a situation arises, you will have the following four options:
- Close down the business
- Continue the business with new owners
- Sell your shares
- Purchase shares from the deceased owner’s estate
Funding Buy Sell Agreements
No matter what type of business you own, a buy sell agreement is a must-have in order to ensure the effective ownership transfer of the business. A buy sell agreement can protect your business from the potential damage of losing a partner. A buy sell agreement is a legally-binding contract or provision within a shareholder agreement that specifies what will happen when one of the partners, shareholders or co-owners passes away, becomes permanently disabled or leaves the business. The agreement outlines the terms of sale, time of sale, sales price, buying price of shares, and financing options. The following options are available to fund a buy sell agreement:
- Using cash reserves
- Establishing a sinking fund
- Getting a loan from a financial institution
- Depleting your personal savings
- Selling your assets or inventories
- Buying out the departing shareholder's share via instalments
- Buying life insurance and disability insurance to provide funds when needed
How to Fund a Buy-Sell Agreement with Life Insurance?
Having a proper buy sell agreement in place is vital for the continuity and success of your business and helps you to avoid potential business disruptions that may arise. The smartest method for funding a buy-sell agreement is through life insurance. Funds are immediately available upon death, and death benefit proceeds are income-tax free. In addition, Life insurance provides the necessary dollars at a far lower cost than borrowing to fund a buy-out and the premiums will likely be significantly lower than the cost of repaying loan interest. There are three main methods to fund these types of agreements:
1. Criss-Cross Method: Each owner purchases a life insurance policy on the other owners and is a named beneficiary of the policy. Upon the death of an owner, each surviving owner receives the life insurance proceeds income tax-free and uses the proceeds to purchase the deceased’s business interest. Heirs of the deceased receive an agreed-upon payment for their inherited business interest.
2. Promissory Note Method: The Company purchases a life insurance policy on the life of each shareholder. The company is named as the sole beneficiary of the policies. Upon the death of one of the shareholders, the company receives the insurance benefit and pays the proceeds to the surviving shareholder(s) as a capital dividend, allowing them to honour the promissory note.
3. Corporation Redemption Method: The Company purchases a life insurance policy on the life of each shareholder, and the company is named the beneficiary of each of the policies. Upon the death of an owner, the company receives the life insurance proceeds and uses said proceeds to purchase the deceased’s business interest. Heirs of the deceased receive an agreed-upon payment for their inherited business interest.
Benefits of Life Insurance Funded Buy Sell Agreements
1. Tax-free Death Benefit: Life insurance proceeds are tax-free to the beneficiaries.
2. Provide The Buyout Cost: With a buy-sell agreement funded by life insurance, all costs involved are covered, in exchange for a small premium.
3. Provide Cash To Buyout Interest: If sufficient cash values are available within the policies, the funds can be used to purchase your interest in the business along with purchasing shares of a partner.
4. Protect the Liquidity Needs: A life insurance funded buy sell agreement will protect the company’s liquidity needs at a very vulnerable time.
5. Ensure Smooth Transition: It helps to ensure the effective ownership transfer of the business in case of a death or disability.
6. Ensure Business Continuity: It ensures the survival and business continuity of the company business in case unforeseen circumstances.
7. Ensure the Future Security: A buy sell agreement protects all partners in a business and helps secure the future of your business and your family.
8. Flexible Policy Ownership: Policy may be owned by the business—or each owner can own a policy on each of the other owners.
9. Safeguard Business Assets: It safeguards business assets by providing a cash payout to surviving owners/partners and hence they are not forced to use personal funds or business assets to fund the agreement.
10. Transfer the Risk: It helps transfer all unpredictable risks to a third party for a complete peace of mind.
If you are a business owner worried about the continuity and longevity of your business without any disruptions, no matter what type of business you own, a buy sell agreement is a must have to ensure the effective ownership transfer of the business. A buy sell agreement can protect your business from the potential damage of losing a partner. Although there are many ways to preserve the future ownership of your business, Life Insurance is the most viable solution of all. It provides a tax free benefit and is usually less expensive than the other available options. It is the right choice if your company has more than one owner or partner and you don’t want to use personal funds to purchase the interests of an owner or partner who can no longer run the company Buy sell insurance can keep your business running and protect the financial interests of each owner’s family. A buy-sell agreement funded with life insurance gives you the confidence that your business and family will be taken care of in your absence and the cost is small compared to the benefits. Give us a call if you are looking for insurance solutions to protect your business. We are insurance brokers which allow us to deal with major Insurance Companies to serve our clients with the best possible product and services at the lowest rates. We will take time to understand your specific business situation and find the right coverage to safeguard your success.
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