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Friday, November 20, 2009
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Advanced Life Insurance
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Call us at (800) 940-3002
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What is a buy/sell agreement?
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DISCLAIMER: The purpose of this information is to provide general information which
is subject to change and is specific to state law.
ReliaQuote is not providing legal advice. If you have a specific legal issue
or accounting issue, you should consult with a lawyer who is licensed to practice
law in your jurisdiction or a certified public accountant familiar with tax regulations
in your jurisdiction. |
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A Buy/sell Agreement is a contractual agreement that provides for the continuation
of a business in the event of the death or disability of a sole proprietor, partner
or shareholder. An agreement may stipulate that, upon the death of a shareholder
or partner of a company, the company or other partners buy back the deceased's interest
in the business. Life insurance is commonly used
to fund buy/sell agreements because it provides both liquidity and tax advantages
in funding the transaction.
The following are important reasons to use a funded buy/sell agreement:
- Liquidity-A funded buy/sell agreement creates a market instantly for the
deceased’s share of the business. Otherwise, if a funded buy/sell agreement were
not in place, the purchase of the deceased’s stake in the business would have to
come out of the company’s working capital (if there was enough to fund the purchase).
In addition, if an outside party were to purchase the deceased’s share, the timing
of the transaction could result in a lower valuation of the company because of the
death of a key owner and the fact that the deceased’s family wants to sell in a
potentially soft market.
- Transition of Business-A funded buy/sell agreement assists in the efficient
preservation and transition of the control and management of the business.
- Estate Planning-A funded
buy/sell agreement can provide cash for potential estate taxes and settlement costs
and establish a valuation of the deceased’s business interest for estate tax purposes.
- Cost-a funded buy/sell agreement funded with life insurance can be inexpensive
(the cost for the purchase of a business is essentially the premiums paid for the
life insurance policy).
Life insurance provides a simple way to administer a funding vehicle for the purchase
of the deceased’s ownership according to the terms of the buy/sell agreement. The
business also protects itself from any future drain on working capital, damage to
its credit position and/or the legal or financial problems that could arise out
of the company’s inability to fund the buy/sell agreement with its own income.
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