Designing a business continuation plan is an important step to ensuring a client’s company remains intact at retirement, death or other triggering event. Whether you leave the business by choice or by chance, you can try to exit the business on track and provide for your family’s future. By arranging a buy-sell agreement utilizing life insurance, you can protect yourself, the company shareholders, and your family.

When a buy-sell arrangement is funded with life insurance, the policy owner (normally a co-owner of the business or the company itself) makes use of the coverage proceeds to buy out the business interest of another owner who retires, becomes disabled, or dies. Or, if you choose to retire, the cash value of the life insurance coverage may be accessed by way of partial withdrawals and policy loans to offer a down payment to help in funding the buyout of your share of the business. Cash values could also be accessed by taking loans and withdrawals from the policy. Loans and withdrawals could generate an income tax liability, decrease available cash value and reduce the death benefit or cause the policy to lapse.

A well-constructed buy-sell agreement anticipates how the worth of a business could change over time and provides for appropriate changes in the amount of the buyout price. The amount of life insurance could be designed to vary with the buyout value, so you are always correctly covered.

Funding Buy-Sell Arrangements

Buy-sell agreements need a funding mechanism to make sure cash is available to carry out the agreement if a triggering event happens, with out causing financial hardship to the parties involved. Even the most carefully drafted buy-sell arrangement might show useless if there are not any funds to buy the deceased owner’s interest. Several funding methods apart from life insurance are available, but all have disadvantages:

Using funds from present working capital to fund an installment buyout might restrict the company’s means to operate and will be costly because each dollar paid for the business interest is a nondeductible after-tax dollar. As well as, these funds would stop if the business were to fail.

Borrowing funds from a third party will result within the total amount paid for the company being much greater than the acquisition price, with the ultimate price relying on the rate of interest and length of the loan. In addition, a lender is probably not willing to lend funds to the business at the very time those funds are wanted – when an shareholder dies.

A sinking fund is a viable resolution when a shareholder is uninsurable. One concern with this method is that it may take years to build the required funds, but the death of the shareholder or other triggering events could occur at any time. Additionally, a sinking fund is pricey because deposits are made with personal or business after-tax dollars. Earnings on the fund may be decreased by income taxes.

Using Life Insurance to Fund a Buy-Sell Agreement

Life insurance coverage is potentially the least costly technique of funding a buy-sell agreement which makes the required dollar obtainable at the actual time funds are most wanted (at the death of an shareholder). Some benefits of funding a buy-sell arrangement with life insurance could include:

Cash is instantly available to the entity or its surviving owners to buy the deceased owner’s interest. This also potentially generates supplemental income to the deceased sharholder’s family or could help pay estate settlement taxes.

Death benefit proceeds from the life insurance coverage are generally income tax free (e.g. absent a transfer for value), and if correctly structured, may be free from estate taxes. It is important to note that the beneficiary may be subject to state income taxes and the federal alternative minimum tax. For insurance policies issued after August 17, 2006, IRS 101(j) provides that death benefits from an employer-owned life insurance policy are income taxable in excess of premiums paid, unless an exception applies and certain notice and consent requirements are met before the policy is issued. Please consult your tax or legal advisors for more information. Moreover, life insurance owned by a C-corporation could subject the company to the alternative minimum tax

No monetary strain on the buyer at the time of purchase. Receipt of the death profit proceeds permits the satisfaction of the obligation under a buy-sell agreement while releasing company cash flow and personal funds for different endeavors.

Cash value accumulations can be utilized as a considerable down payment in the occasion of other triggering events, equivalent to disability or retirement.

For additional information on Buy Sell Arrangement it is important to speak with an experienced advisor.