ENTITY BUY-SELL AGREEMENTS

(Funded with Life Insurance)

WHAT IS AN ENTITY BUY-SELL
AGREEMENT?
An entity buy-sell agreement is an agreement
between the owners of a closely-held business
and the business entity itself under which the
entity agrees to purchase the interests of the
owners, and the owners agree to sell their
interests, upon the occurrence of any of the
specified triggering events.
CLIENT PROFILE
Owners of a business who need or want a
business continuation plan and who do not
wish to pass their interests on to other
family members such as children
HOW IT WORKS
HOW TO IMPLEMENT
1. Advisor identifies an appropriate
closely-held business whose owners
need or want a solid business
continuation plan.
2. The owners and the business entity
enter into an agreement under which
the entity agrees to purchase the
interests of the individual owners and
the owners agree to sell their
interests upon the occurrence of a
specified triggering event.
3. The business entity purchases a life
insurance policy (and, it is hoped, a
special buy-out disability policy) on
the life of each business owner and is
the owner, beneficiary, and premium
payor of each policy.
4. Upon the death, disability, or
retirement of an owner, the death
benefit proceeds or cash values, or
disability proceeds, are used to
purchase the owner’s interest.
5. Premiums, of course, are not tax-
deductible, but proceeds are tax-free.

WHY USE AN ENTITY BUY-SELL

RATHER THAN CROSS-PURCHASE?

The primary reason is simplicity, especially

when there are several business owners,
because only one life (and disability) policy is
needed on each owner. Another important
reason is that the business itself pays the
premiums for all the insurance policies without
the need for overlaid arrangements such as
split-dollar. The major drawback of an entity
buy-sell is that the remaining owners receive
no cost basis increase in a “C” corporation,
and only a partial increase in other business
entities, when a terminating owner is bought-
out. This is important if the surviving owners
later sell their interests during their lifetimes.