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Life Insurance Key to Success in 'Buy-Sell' Agreements

Life Insurance Key to Success in 'Buy-Sell' Agreements

By    |   Monday, 02 October 2017 07:21 AM

life, insurance, key, buy,sell, agreements

What happens when the main business owner, key employee, another partner in the partnership, the driving force behind the enterprise, is disabled or dies?

Certainly, the business is hard hit. It’s analogous to a four-cylinder engine suddenly running on three cylinders---providing it has not already seized up

Disability is 400 times more likely to occur at any one moment in time that death.

But either of these dire circumstances is always possible. In fact, one or the other happens far more often than you think.

There is any number of other situations where the continuation of a business may be in question.

Many business owners have the lawyers draft up various plans or agreements to cover such contingencies.  The feeling being that once something is written down that the problem has been solved.

Unfortunately, what a business needs to carry on when an emergency happens is cash.  Having in hand a written agreement is a good first step, but it is not cash.

Buy-Sell agreements specify which triggering events cause one person, their trust or estate, to sell their business interests.

Death or disability are typical, but other events as retirement, divorce, bankruptcy or even criminal behavior may be concerns as well.

With closely held or privately held businesses, figuring out the valuation of the interest being bought or sold is not an easy proposition. There are various formulas which are commonly used, but each situation has its peculiarities. 

Standard off-the-shelf or online forms are not recommended. 

The key to making a buy-sell agreement work is to fund them with life insurance.

 Depending on the circumstances, the policies are taken out owned on an individual basis, through a trust arrangement, or by the businesses itself.

With all the financial uncertainty these days, life insurance is looking like a pretty good idea for those looking for safety and security. 

Besides, life insurance provides certitude the amount of cash needed will be available at the right time.

Insurance companies function using the law of large numbers which reduces risk exposure while enjoying the build-up of income under the policies on a tax-free basis. 

There are two other important benefits.

First, the death benefit proceeds are receivable free of income tax.

Second, the amount of the cash surrender value can be borrowed on a tax-free basis.

Businesses usually include the increase in the cash surrender value as an adjustment to their current earnings.  

There are, of course, tax complications which depend on how the buy-sell is written and funded. Fortunately, the tax issues are well understood in these arrangements so business continuation planning can be undertaken with confidence.

For people who are already operating a closely-held or privately held business, or forming a new one, having a written buy-sell arrangement in place to assure the business will continue is critical.

The key to making a business continuation plan work is to fund the financial obligation by using life insurance.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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Life Insurance Key to Success in ‘Buy-Sell' Agreements
life, insurance, key, buy, sell, agreements
Monday, 02 October 2017 07:21 AM
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