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Home : Planning Your Finances : For Your Business : Buy-Sell Agreements
Buy-Sell Agreements
The death of an owner or partner of a business can cause financial problems and hardship for the business. Buy-sell agreements are plans used by members of a partnership and stockholders in closely-held corporations to assure that funds are provided to allow remaining owners to buy the deceased's portion of the business.
In order to guarantee a buyer for the interest in a business, consideration should be given to a lifetime agreement among the business owners as to how to dispose of or continue with the business.
Advantages of Buy-Sell Agreements
Methods of Funding a Buy-Sell Agreement
Advantages of Buy-Sell Agreements
- Can guarantee a buyer for an asset which may not pay regular income to one's heirs.
- Under certain circumstances, can establish a value for federal estate purposes which is binding on the IRS.
- Can spell out the terms of payment and is easily funded by life insurance and disability insurance, if desirable.
- Can provide a smooth transition of complete control and ownership to those who are going to keep the business going.
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Methods of Funding a Buy-Sell Agreement
Personal Funds of Buyers
Most successful business people do not keep large sums of liquid assets on hand. Their money is working in their business.
Sinking Fund in the Business
Such a fund will be inadequate if death is premature and the time of need is uncertain. A corporation may develop an accumulated earnings tax problem.
Borrowed Funds
Loss of a key person may impair the credit-worthiness of the business and other partners and shareholders. Interest costs may be excessive and interest expense may not be deductible.
Installment Payments to Heirs by Buyer
The business may fail and the payments stop. The principal and interest payments may be too burdensome.
Life Insurance Owned by the Buyer
There may be several key advantages to life insurance in funding a buy-sell agreement:
- Complete financing guaranteed from the beginning.
- Death proceeds are generally free from Federal income tax.
- Cash values can be used for a buyout due to retirement or disability.
- It may be the most economical method - discounted dollars.
- Credit position is strengthened.
For more information and help with your business planning needs, contact a
Transamerica representative.
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