Plan Business Succession Soundly with Buy/Sell Agreement Insurance
An important, albeit unpleasant, part of owning a business is making succession plans. If you as the principal or another owner passes away, you need a concrete, straightforward succession plan in place. Without one, the future of your business may be in jeopardy. Buy/Sell agreement insurance strategies are the most effective way to ensure that even after you or your partners have moved on, your business will be equipped to continue in a way that you approve of.
A buy/sell agreement insurance strategydetermines what will happen to the shares of a business owned by a partner who passes away. It may mandate that the shares revert to a spouse or child, or it may require that he remaining partners buy the newly available shares. To ensure that capital is available to support a buyout, oftentimes parties will take out a life insurance policy and name the remaining partners as beneficiaries. Then the beneficiaries can take the proceeds yielded from the life insurance policy and purchase the remaining shares.
This is known as buy-sell agreement insurance. Policies may be purchased under a few different sets of terms. First, a businessowner may take a policy out on his or her self. This type of buy/sell insurance is ideal for businesses owned by a sole proprietor.
A second type of buy/sell agreement insurance is a discretionary trust, in which a trustee is nominated to hold the policies of all the various business partners. Or in businesses with multiple owners, a cross-ownership agreement may be purchased. In this case insurance is held by each partner on the others.
Finally, a company owned buy/sell agreement insurance policy is held by the company. So if a company has many shareholders, this type of buy/sell agreement insurance is your best option.
Buy/sell insurance proceeds are tax-exempt; however the expense is subject to taxes. In terms of what determines the payout on buy/sell agreement insurance, that will be stipulated at the time of purchase. It could be determined by the company’s book value, or a predetermined agreed upon value, the value at time of appraisal, or the company’s capitalized value.
Buy/sell agreement insurance provides peace of mind in knowing that a buy/sell agreement will be executed in the manner you desire. Rather than see the business you’ve worked so hard to build wind up in less-than-optimal hands, protect your investment with buy/sell agreement insurance.