Vol.

I, Issue 11, July 2008

For more information, contact:

Scott Safranek, RVP

MAKERS
Tel: 402-502-2919

John Gabriel, FMC

Tel: 800-659-5920 x5813

Buy-Sell Agreements: Information and Resources

By Ed Sanchez, CLU, ChFC, MBA, MSFS, Advanced Sales Consultant

There is no doubt that planning for life transitions remains a great challenge for most of us. For business
owners, the greatest transition is often business succession.
A well thought-out succession plan can answer many questions facing the business owner. Questions such as:
• How will my family receive a full and fair value for the business if I die?
• If there is an obvious buyer (shareholder, key person, competitor, etc.), where will he/she obtain the funds
with which to purchase the business from me or my estate?
• How do I avoid remaining in business with my partner’s heirs in the event that partner dies prematurely?
Where will I obtain the necessary funds to buy him/her out?
A properly drafted buy-sell agreement, funded with life insurance, addresses these questions and creates the
cash necessary to ensure that the agreement is completed to the satisfaction of all parties.
The Basics
Normally, a buy-sell arrangement consists of two primary components: 1) a properly drafted written agreement,
and 2) the funding mechanism, typically life insurance.
The agreement is prepared by your client’s legal advisor and normally states the purchase price for his/her
shares of the business, the terms of purchase, and any funding arrangements.
The agreement obligates either the surviving owner(s) or the business itself to buy and the deceased owner’s
estate to sell based on a triggering event such as death, retirement or disability. The business interest may be
sold to the surviving business owners, a key employee, an outside party or some combination thereof. The
agreement also sets the price or establishes a formula for determining it.
The funding for the arrangement is easily accomplished with the purchase of life insurance on the life of each
business owner. Depending upon the structure of the buy-out arrangement, the policies might be owned
by the business or by each owner on every other owner’s life. More comprehensive descriptions of these
arrangements are available in the resources cited below.
Either term life or universal life may be used to fund the arrangement. Term is most often used for newer
companies or those with limited cash flow and universal life for a firm with more predictable cash flow or when
owners are also interested in accumulating cash value.
Most business owners want to be sure that their years of hard work are fairly rewarded and that their loved
ones receive fair value for their business interest in the event of their death. A properly written and funded buy-
sell agreement can help make that happen and also ensure that the business continues uninterrupted in the
hands of one or more surviving owners who are best qualified to run it.
Existing buy-sell arrangements should also be periodically reviewed because business and circumstances
change over time. Is the agreement funded with life insurance? Is the amount adequate? Is it the appropriate
type of product? After all, the most perfect document may not achieve your client’s goal if there is no cash to
fund it. Life insurance creates the cash at the precise moment the need arises so that surviving owners and the
continued
FOR PRODUCER USE ONLY — NOT FOR DISSEMINATION TO THE PUBLIC
MAKERS
deceased owner’s family can feel they have been treated fairly and with dignity in the orderly transition of ownership.
Sales Resources for Buy-Sell Agreements
AIG American General provides a wealth of resources to support the sale of life insurance in conjunction with
Buy-Sell Arrangements and other business insurance concepts. Accompanying this article in pdf format are
samples of materials that are readily available to you. These include:
• An Employer Fact Finder (#AGLC102895) that can be used to identify a variety of business insurance
needs. This is also available in FastForms.
• Producer-only educational information on Business Buy-outs from Advanced Markets Online. You
can access these materials from the Sales Tools on our illustration software CD or from our Web site
(Marketing/Advanced Sales/Sales Tools).
• Consumer-approved information on Business Continuation, Entity Buy-Sell Agreements and Cross
Purchase Buy-Sell Agreements from AMO Salesmaker, a companion program to Advanced Markets
Online. You can access these materials from the Sales Tools on our illustration software CD or from our
Web site (Marketing/Advanced Sales/Sales Tools).
• Overview of Buy-Sell Agreements Funded with Life Insurance from the “Tapestry” advanced sales
software program. This material is approved for consumer use. You can access this material by running
a life insurance illustration and while viewing the illustration on screen, selecting “Tapestry” from the
options to the left. The illustration data (e.g. client and producer names) will be carried over from the
illustration into the Tapestry material.
• Presentation on Buy-Sell Agreements Funded with Life Insurance from the “Tapestry” advanced sales
software program. This material is approved for consumer use. You can access this material by running
a life insurance illustration and while viewing the illustration on screen, selecting “Tapestry” from the
options to the left. The illustration data (e.g., client name, producer names, policy data) will be carried
over from the illustration into the Tapestry material.
Note: AMO Documents, a companion software program to Advanced Markets Online and AMO Salesmaker,
contains specimen agreements for many business insurance needs. If needed, these specimen agreements
can be shared with clients’ attorneys as a general reference. Producers and their clients should not attempt to
utilize these agreements without seeking advice of counsel.
Where life insurance is employer-owned, notice, consent, and status requirements of the Pension Protection Act, effective August 17, 2006, must be met by the employer prior
to policy issuance in order for the entire death benefit to be received income tax-free. Generally, these require that the key employee be notified of the insurance, and provided
other information regarding the insurance, give consent to being insured, and fall within a certain status with the employer, as defined by the Act. For additional information,
visit the producer Web site and go to: Employer Owned Life Insurance.

Policies issued by:

American General Life Insurance Company
2727-A Allen Parkway, Houston, Texas 77019
The United States Life Insurance Company
in the City of New York
New York, New York
Subsidiaries of American International Group, Inc. (AIG)
The underwriting risks, financial and contractual obligations and support functions associated with the
products issued by American General Life Insurance Company (AGL) or The United States Life Insurance
Company in the City of New York (USL) are each insurer’s own responsibility. AIG does not underwrite
any insurance policy referenced herein. USL is authorized to do an insurance business in New York.
Policies not available in all states.
AIG American General, www.aigag.com, is the marketing name for the insurance companies and affiliates
comprising the domestic life operations of American International Group, Inc. (AIG).
Important: Prior to soliciting business, be certain that you are appropriately licensed and appointed with the
insurer and that the product has been approved for sale by the insurer in that state. If uncertain, contact
your AIG American General representative for assistance.
©2008 American International Group, Inc. All rights reserved.
FOR PRODUCER USE ONLY — NOT FOR DISSEMINATION TO THE PUBLIC
 Discussion guide
with business owners

Employer
Fact Finder
Business owners often are too busy to give much thought to planning for their business in the event of their death,
disability, retirement, or other unforeseen event. This brief discussion guide can help you focus your meeting on what
needs the business owner may have and how you can assist in the planning process—for the future of the business
owner, business, and employees.

Company Overview
Business owner_________________________________________________________________________________________________________

Business name_______________________________________________ Nature of business_________________________________________

Address_____________________________________________________ State/Zip code_____________________________________________

Telephone_ __________________________________________________ FAX______________________________________________________

Contact e-mail________________________________________________ Business Web site_________________________________________

What is the legal form of business? o Sole proprietorship o Partnership o LLP o LLC o S Corp. o C Corp.

Current tax bracket?___________________________________________ Number of owners/shareholders?____________________________

Are owners related? o Yes o No Indicate family relationships_________________________________

Number of years in business?__________________________________ When does owner plan to retire?_ ___________________________

What are the business’ goals – short term and long term?_ ___________________________________________________________________

_______________________________________________________________________________________________________________________

Upon retirement, will the business be: o Retained o Sold o Liquidated

If the business is retained, who would manage it? o Spouse o Child o Key employee o Other

If the business is sold, who will buy the business? o Key employee o Family member o Third party

If the business was being sold today, what would be the asking price?_ ________________________________________________________

Is there a buy-sell agreement in place? o Yes o No Is it funded? o Yes o No

How is it funded?________________________________________________________________________________________________________

What is the agreed-upon sale price?________________________________________________________________________________________

How was the valuation determined?________________________________________________________________________________________

What is the source of retirement income? o Pension o Personal savings o Sale of business o Have not thought about it

Percent of owner‘s total estate made up by the business?____________________________________________________________________

In the event of the owner’s premature death, what would happen to the business?_ _____________________________________________

_______________________________________________________________________________________________________________________

Is there a business succession plan should the owner become disabled? _______________________________________________________

If so, what is it?_ ________________________________________________________________________________________________________

Will the owner’s salary be continued? o Yes o No How much?_ ___________________ How long?____________________________

Today, what concerns the business owner the most about the business?_ ______________________________________________________

_______________________________________________________________________________________________________________________
Key Employees
In designing benefit programs for key employees, there are several issues to consider. How the business owner answers these
questions will help determine which program(s) might best fit.

How many employees does this business have?_____________________________________________________________________________

Are any of them “key” to business operations? o Yes o No How many?_____________________________________________

Is there a qualified plan currently in place? o Yes o No If yes, what type of plan?_________________________________

Are key employees capped out of their qualified plan? o Yes o No If yes, what type of plan?_________________________________

Are there any supplemental programs to help retain key employees? o Yes o No

Types: o Executive Bonus o Non-Qualified Deferred Compensation o Salary Continuation

Details_ ________________________________________________________________________________________________________________

If the business owner were to increase or provide additional benefits, who would the business owner want to benefit the most?
o Owner-employees o Non-owner employees

With that in mind, which of the following items are most important to the business owner? Please indicate order of importance:
(1 – most important; 4 – least important)
_____ Tax deductible to the business _____ Employer control of plan assets
_____ Ability to pick and choose who benefits _____ Cost recovery

Professional Advisors
Attorney________________________________________________________________________________________________________________
Address_____________________________________________________ State/Zip code_____________________________________________
Telephone_ __________________________________________________

Certified Public Accountant________________________________________________________________________________________________

Address_____________________________________________________ State/Zip code_____________________________________________
Telephone_ __________________________________________________

Other Advisor___________________________________________________________________________________________________________
Address_____________________________________________________ State/Zip code_____________________________________________
Telephone_ __________________________________________________

Key Employee Census

Hire Birth Tobacco Annual Ownership
Key Employee Name Sex Title Date Date Use (Y/N) Earnings %
AIG American General, www.aigag.com, is the marketing name for the insurance
companies and affiliates comprising the domestic life operations of American
International Group, Inc. (AIG), including American General Life Insurance Company.

AIG American General companies offer a broad spectrum of fixed and variable
life insurance, annuities and accident and health products to serve the financial
and estate planning needs of its customers throughout the United States.

© 2008 American International Group, Inc. All rights reserved.

AGLC102895
Business Buyouts:
Entity Buy-Sell Agreements

What Is a Buy-Sell Agreement?

When a business owner dies, the disposition of his or her business interest can become a two-edged sword, creating problems for
the business owner's heirs as well as the business itself. Critical questions must be answered:
• Who will purchase the business interest?
• What is a fair price?
• When will the sale be made?
• Where will the funds come from?
This "disposition dilemma" is easily resolved when a buy-sell agreement is established. This agreement provides that:
• someone (e.g., the business entity, the surviving owners, or a key employee) will purchase a deceased owner's interest at an
agreed-upon price, and
• the deceased owner's estate is obligated to sell the interest at that price.

The Purpose of Buy-Sell Agreements

For illustrative purposes, imagine yourself in partnership with two associates. The other two partners are Bob and Elaine. If Bob
dies, his business interest passes on to his estate, and ultimately to his wife, Megan. Unfortunately, Megan knows nothing about
the business. You and Elaine do not want to form a new partnership with Megan as a business partner, and you don't want Bob's
interest sold to an outsider.
It should be added that Bob and Elaine face the same dilemma regarding your heirs. Fortunately, if a buy-sell agreement is in
place, none of these potential problems will arise. All the owners know who will receive the deceased owner's business interest as
well as how much will be paid for that interest.
A properly drafted buy-sell agreement:
• minimizes the possibility that the business might fall into the hands of outsiders
• minimizes the possibility that the parties involved will not be able to agree on a proper value for the business and puts everyone
on equal footing while all the parties are alive
• minimizes the possibility that funds will be unavailable to make the purchase
• provides a deceased owner's estate with needed liquidity by converting an illiquid asset into cash.
It's easy to see why a buy-sell agreement is so valuable. It helps assure business continuity for the surviving owners and fair
treatment of the deceased owner's heir(s).

Entity Buy-Sell Agreements

Under an entity or stock redemption agreement, the business agrees to purchase a deceased owner's interest. To help fund the
agreement, the business purchases life insurance on the life of each of the owners; the business owns the policies and is the
beneficiary of each policy. The face amount of each policy approximates the purchase price for the insured's business interest. The
purchase price is usually set in one of two ways:
• a definite fixed amount is stated in the agreement, or
• a formula is specified by which a definite price can be established.

Graphic: How the Entity Buy-Sell Agreement Works

Cross-Purchase: An Alternative to Entity Agreements

An alternative to an entity agreement is a cross-purchase buy-sell agreement. Under a cross- purchase agreement, the surviving
owners (rather than the business itself) agree to buy the deceased owner's interest. This arrangement is usually memorialized in a
written agreement among the owners.
In recent years, the cross-purchase agreement has often been preferred to the entity agreement because the surviving owners in a
cross-purchase receive an increase in the basis of their business interests that will reduce their gain upon a later sale of the
interest. The survivors receive no such increase in basis when the entity purchases a decedent's interest.
Also, in the cross-purchase agreement, there is no potential for a corporate alternative minimum tax (AMT) liability as there is in an
entity agreement. (Note: Recall that the AMT has been repealed for "small corporations" after 1997.)
Click here for a more detailed discussion of the basis issue.
For more about cross-purchase agreements generally, click here.

When the Entity Agreement Is Preferred

While there are no fixed rules, here are some of the situations where an entity or stock redemption agreement may be preferable to
a cross-purchase agreement:
• There are a large number of owners. An entity or stock redemption plan means there is one policy for each owner. Under a
cross-purchase agreement, each owner would generally own a policy on every other owner.
• There is a wide disparity in the ages of the owners. A cross-purchase agreement would force younger owners to pay high
premiums for policies on the lives of older owners.
• The business wants the cash values of the policies to be available as reserve funds, which would not be possible under a
cross-purchase agreement. (If the business uses these cash values the death benefit would be reduced and an owner's untimely
death could create financial distress, since loans or withdrawals will reduce the death benefit payable, possibly defeating the
purpose for which the agreement was intended.)

Funding Options
The insurance professional has two responsibilities when discussing buy-sell agreements:
• establish the need for the agreement, and
• show why insurance products are appropriate for funding the agreement.

The Life Insurance Advantage

As long as premiums are paid when due and there have not been significant loans or withdrawals, the business may have funds to
help purchase a deceased owner's business interest. By contrast, building an investment or reserve fund takes time; if an owner
dies "too soon," the business may not have the funds it needs to purchase the deceased owner's business interest.

Taxation of Entity Buy-Sell Agreements

Premiums paid for life insurance used to fund an entity or stock redemption buy-sell agreement are not tax-deductible by the
business. Generally, policy death proceeds are exempt from the federal income tax. However, in some situations, a C corporation
may be subject to the corporate alternative minimum tax on part of the proceeds it receives. Further, under a corporate stock
redemption agreement, there is no increase in basis for a surviving owner's business interest, as there is with the cross-purchase
agreement.
Distributions from a corporation to a shareholder are generally taxed as dividends unless a special exception is available under tax
law. For the shareholder's estate or heir to avoid dividend treatment, a stock redemption must qualify as one of the following:
• not essentially equivalent to a dividend (a facts-and-circumstances test of limited use in planning),
• substantially disproportionate (a strict mathematical test under which the shareholder's percentage interest in the corporation
must decline by specified minimum amounts),
• a complete termination of the shareholder's interest in the corporation, or
• a qualifying partial redemption under Section 303. Click here for more information on 303 redemptions.
If the corporation's distribution in payment of its buy-sell obligation fits one of these categories, the transaction will be treated as the
sale of a capital asset and not as a dividend distribution. While most long-term capital gains and dividends now are taxed at the
same 15% rate, there will usually be little or no capital gain to report if a redemption is carried out shortly after the shareholder's
death, due to stepped-up basis (through 2009).
Stepped-up basis is scheduled to be repealed for one year beginning on January 1, 2010, and then reinstated on January 1, 2011.
A limited step-up will be available in year 2010.

Family Attribution Rules

The redemption (unless under 303) will usually terminate the estate's or heir's interest in the corporation. The problem is that the
estate or heir may be treated under the attribution rules as constructively owning stock actually owned by others: spouse, children,
grandchildren, or parents (and also certain entities such as trusts, estates and businesses). However, assuming all direct interests
in the corporation have ceased, including any interest as an officer, director or employee (being a creditor is permitted), the family
attribution rules may be waived by filing an agreement with the IRS not to reacquire an interest in the corporation in the next 10
years. This will then allow a redemption to be a "complete termination of interest" despite continuing ownership by close family
members.
Note that the entity attribution rules may not be waived.
The Deceased Owner's Estate
If specific requirements are met, a properly drafted buy-sell agreement can establish the value of a deceased owner's business
interest for estate tax purposes. However, the value derived from the agreement must approximate the fair market value of the
business interest when the agreement is made. Under IRC Sec. 2703, an agreement entered into after October 8, 1990, can
establish the value of a closely held business if (1) it is a bona fide arrangement, (2) it is not a device to transfer the business to
family members for less than full and adequate consideration, and (3) it has terms comparable to those of arm's-length agreements.
The accumulated case law has created certain additional rules, which apply even if a particular agreement is not subject to IRC
Sec. 2703 (e.g., because it was executed before October 8, 1990): (4) the estate must be obligated to sell at an owner's death,
either under a mandatory agreement, or under an option held by the business or the surviving owners; (5) the sale price must be
fixed by the agreement, either as a dollar amount or by some formula for determining the price; (6) the agreement must prohibit an
individual owner from selling his or her interest during life without first offering it to the business or to the other owners at a specified
price; and (7) the price set in the agreement must have been fair and adequate at the time the agreement was made.
If the methodology for determining the price is reasonable, it may discourage the IRS from challenging the valuation of the business
interest. One thing is certain, however—with no agreement in place, it might take years before an equitable disposition of a
business interest occurs. This may mean that the deceased owner's estate cannot be closed and may be subject to erosion through
costly delays and possible litigation.

Beyond the Buy-Sell Agreement

In a business setting, it is easy to look at the role of life insurance in terms of how it helps satisfy a contractual requirement.
However, life insurance does more than provide essential funds for the business at a time when the business itself must recover
from the loss of a key contributor. It can prevent unnecessary financial strain for the business and the surviving owners. And it can
help assure that a deceased owner's heirs are treated fairly.

Copyright © 2006, Pentera Group, Inc., 5546 Shorewood Drive, Indianapolis, Indiana 46220. All rights reserved.
This service is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with
the understanding that neither the publisher nor any of its licensees or their distributees intend to, or are engaged in, rendering
legal, accounting, or tax advice. If legal or tax advice or other expert assistance is required, the services of a competent
professional should be sought.
While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be
guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the
publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been
caused, by the use of or reliance upon this service.
U.S. Treasury Circular 230 may require The Pentera Group, Inc. to advise you that "any tax information provided in this document is
not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed
on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed
and you should seek advice based on your particular circumstances from an independent tax advisor."
The Advanced Markets Online materials included in this CD are provided solely as educational information and are for general
informational purposes only. These educational materials are for Agent Use Only; Not for Use with the Public. American General
Life Insurance Company has not undertaken a substantive review, including the accuracy and reliability, of the materials provided
by Advanced Markets Online. Each agent should verify the accuracy and reliability of the information prior to relying on the
Advanced Markets Online material. Thus, American General Life Insurance Company shall not be liable for any loss or damage
caused or alleged to have been caused by the use of or reliance on the Advanced Markets Online materials by any person. Further,
American General Life Insurance Company, its employees, its representatives, and its agents do not provide tax or legal advice. To
the extent that any concept discussed in the Advanced Markets Online materials is presented to a customer, the customer must be
advised that questions relating to potential tax or legal consequences of the concept should be directed to their own tax or legal
advisor.
A Dilemma…
• When a business owner dies, a myriad of potential problems can
• occur.
• The surviving owners want to retain total control of the business
• without interference from the deceased owner’s heirs; they hope
• for a prompt transfer of the deceased owner’s interest at a fair
• price to the surviving owners; and they want to retain the loyalty
• and support of employees, customers and creditors during and
• after the transition in ownership.
• The deceased owner’s heirs want ongoing financial security after
• the loss of the deceased’s salary and benefits; they may
• anticipate either retention of the business interest by family
• members or a prompt sale of the interest at an attractive price;
• and they expect prompt settlement of the deceased’s
• estate–including proper tax-valuation of the business interest–if
• it’s to be sold.

The Reality…
• Conflicts and possibly even litigation might arise between the
• deceased owner’s heirs and the surviving owners.
• Delays in the transition to successor ownership and in settling the
• deceased owner’s estate might be inevitable.
• There can be a potential loss of customers, employees, and
• creditor confidence that can damage the business–and possibly
• even force its liquidation.

CLIENT NAME HERE Thursday, May 8, 2008

The Solution…
• A formal, written buy-sell agreement among the business owners
• is the first step in assuring an orderly and successful transition in
• business ownership following an owner’s death.
• The agreement sets a fair price for the business interest and
• terms of sale that are reasonable to all parties.
• Establishing an agreed-upon price typically sets the value for
• estate tax purposes, which helps to avoid estate settlement
• delays and IRS challenges.
• If the owners are related, a professional appraisal of the business
• should be performed. See your legal counsel for advice on this
• subject.
• An existing buy-sell agreement encourages confidence in the
• ongoing vitality of the business in the eyes of customers,
• creditors and employees.

The Bottom Line…

A properly designed and funded buy-sell agreement satisfies the
legitimate concerns of all parties involved in assuring business
continuation that benefits sellers, buyers, employees, customers
and suppliers.

CLIENT NAME HERE Thursday, May 8, 2008

 What the Heirs Want
The deceased owner’s heirs are hoping
for ongoing financial security after the loss
of the owner’s salary and benefits.

They typically expect prompt settlement of

the deceased owner’s estate, including
proper tax-valuation of the business
interest if it’s to be sold.

They may want to retain the business

When a business owner dies, the
interest–or to sell their inherited interest
consequences depend to a great extent
promptly at an attractive price.
on the preparation that has been done
beforehand in anticipating the event.
In the Absence of Preparation
If there’s no formal, written buy-sell
What the Surviving Owners Want
agreement among the business owners
The surviving owners are typically looking
spelling out what’s to happen when an
to retain total control of the business
owner dies, unhappy consequences may
without interference from the deceased
result.
owner’s heirs.

Conflicts and possibly even litigation

They may also hope for the prompt sale of
between the deceased owner’s heirs and
the deceased owner’s interest at a fair
the surviving owners are not uncommon.
price to the surviving owners.

There are typically delays in the transition

They want to retain the loyalty and
to successor ownership and in settling the
support of employees, customers and
deceased owner’s estate.
creditors during and after the change in
ownership.
Such delays and conflicts can result in a
potential loss of customers, employees,
and creditor confidence that can damage
the business–and possibly even force its
unwanted liquidation.

CLIENT NAME HERE Thursday, May 8, 2008

The Place for a Buy-Sell Agreement
A formal, written buy-sell agreement
among the owners of a business is the
first step in assuring an orderly and
successful transition in business
ownership following an owner’s death.

The agreement establishes a fair price for

the business interest, and the terms of the
sale are set out in advance to be
reasonable and agreeable to all parties.

An agreed-upon value for the business

interest is typically acceptable by the
Internal Revenue Service for estate tax
purposes if the value is fair and
reasonable, which can help to avoid
estate settlement delays and IRS
challenges. If the owners are related, a
professional appraisal of the business
should be performed. See your legal
counsel for advice on this subject.

Confidence in the ongoing vitality of the

business is generally assured in the eyes
of customers, creditors and employees.

Result: A clear solution to a series of

knotty problems, thanks to a properly
designed and funded buy-sell agreement
that satisfies the legitimate concerns of all
parties and benefits sellers, buyers,
employees, customers, and suppliers.

CLIENT NAME HERE Thursday, May 8, 2008

CLIENT NAME HERE Thursday, May 8, 2008
 AIG American General

Buy-Sell Funding
with Life Insurance

Presented to: Client Name

Presented by: Producer Name

May 8, 2008, 2:49pm Page 1 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Business Continuation Planning - Before It's Too Late

Following the death of a business owner, any remaining owner(s)

may face serious decisions with few alternatives. Their very own
business future may be in jeopardy.

They generally face four alternatives:

1 Accept Heirs into the Business

2 Accept Outsiders into the Business

3 Sell the Business to the Heirs

4 Buy the Business from the Heirs

A Properly Drafted and Funded Buy-Sell Agreement May...

... provide for the sale of the owner’s business interest at death,
disability or retirement. Additionally it may

Assure the transfer of the business at a price and on terms that

are acceptable to all parties. A forced sale or liquidation can
thus be avoided.

Provide liquidity. A disabled or retired owner can diversify

his/her investments and generate income. At death, the
buy-sell proceeds can help pay estate taxes and other
debts and administration expenses.

Maintain control of the business for surviving owners. The

deceased's heirs will not take control or create conflict with
the remaining owners’ objectives.

Help retain key employees. At death, disability or retirement

of any owner, the business will continue. Key employees,
hopefully, will remain employed and happy.

Establish value for estate taxes. If the agreement is properly

drafted and its provisions are followed by the parties, the IRS
may accept the business value for estate tax purposes.*

* NOTE: The IRS applies special rules for valuing a business transfer among
family members.
These alternatives require advanced planning, such as a written agreement
and adequate funding, regardless of the choice.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 2 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Buy-Sell Agreements

There are two primary forms of buy-sell agreements, as shown below. These agreements
may address buy-sell options upon an owner's death, disability and retirement. A written
agreement often is recommended by legal counsel.

Cross Purchase Plan

Agreement to sell business

interest to the other owner(s).

Stock Redemption or Entity

Purchase Plan

Agreement to Agreement to
sell business sell business

interest to interest to
company company

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 3 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Cross Purchase Buy-Sell

Funded by Life Insurance at Death

Agreement to sell business

interest to the other owner

Owner A Owner B

Proceeds at Proceeds at
death of death of
Business Business
Cash Owner B Owner A Cash
Interest Interest

Heirs of Owner B Heirs of Owner A

The life insurance policy premiums are not deductible.

Each owner agrees to purchase the interest of a deceased co-owner at an agreed

price.

Each owner applies for, owns, pays premiums and is the beneficiary of a life
insurance policy on each other's life.

Upon the death of an owner, the surviving owner(s) use the life insurance proceeds
to help purchase the deceased's business interest under the terms of the agreement.

If there is a wide disparity in ages or an owner does not receive a policy at standard
rates, the premium differential in the policies may be significant.

Life insurance policies may be protected from personal creditors.

Since each owner must purchase a policy on every other owner, this may be difficult
to administer if there are more than two owners.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 4 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Stock Redemption/Entity Purchase Buy-Sell

Funded by Life Insurance at Death

Premiums
Agreement to sell business

interest to company
Death

Proceeds Owners
Business interest
Company redeemed by company

Cash

Heirs of
deceased owner

The business agrees to purchase the interest of a deceased owner at an agreed price.

Business applies for, owns, pays premium and is the beneficiary of a life insurance policy on
each owner's life.*

Upon the death of an owner, the business uses the life insurance proceeds to help purchase
the deceased owner's business interest under the terms of the agreement.

Since the business pays the premiums, differences in policy premiums may not be a concern
to the owners.

Only one policy per owner may be required, regardless of the number of owners.

The policy premiums are not deductible by the business.

* Death benefits and cash value increase may be subject to the alternative minimum tax which may cause taxes
and penalties.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 5 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Wait and See Buy-Sell Agreement

Funded by Life Insurance at Death

The decision between Cross Purchase or Stock Redemption (Entity) is be difficult because
no one can see into the future to determine which will ultimately be better for all parties.

The Wait and See is a hybrid agreement containing language of both types of buy-sell
agreement. The final buyer of the business will not be determined until after death occurs.

Owners agreement

Owner A Owner B

Owner A and Owner B and

Company Company
agreement agreement

Company

The agreement obligates either the business or the owners to purchase the decedent's
interest at death. The other party then has the first option to purchase this interest.

The party(s) with the obligation purchases life insurance as a cross purchase (if the
owners have the obligation) or stock redemption / entity arrangement (if the business has
the obligation). *

The party(s) receiving the life insurance proceeds use them to help purchase the business
interest for themselves, or can lend to other party(s) to help them finance the purchase.

No decision needs to be made about the purchaser until a business interest is due to be
purchased under the agreement. This provides flexibility for changes in economic times,
tax laws, and the owner's circumstances.

* Death benefits and cash value increases may be subject to the alternative minimum tax which may cause
taxes and penalties.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 6 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Funding a Buy-Sell Agreement

Pay Cash

May require large sums of assets that might not be available.

In some instances, the funds may need to come from personal or business
assets.

Either way, if any assets must be sold, will their fair market rate be readily
available?

Borrow the Money

The loss of an owner, especially if a key person, may impair the credit rating of
the business.

Both the principal and interest must be repaid and could place a tremendous
strain on the budget.

Purchase a Life Insurance Policy

Money available from death proceeds is available exactly when required.

Death proceeds are generally income tax-free.*

May be the most economical.

* Death benefits and cash value increase may be subject to the alternative minimum tax which may
cause taxes and penalties.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 7 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

Funding With Life Insurance

Benefit Summary

For the Deceased Owner's Family:

Their business interest is sold at a fair price.

Provides a ready buyer for their business interest.

Provides cash to replace lost family income.

Provides cash to pay estate settlement costs.

For the Surviving Business Owner(s):

Continuity of business operations.

Provides means to buy out deceased's business interest with

income tax-free death benefit proceeds.*

Removes heirs of the deceased from future involvement.

Life insurance may be the most economical funding method.

* Death benefits and cash value increases may be subject to the alternative minimum
tax which may cause taxes and penalties.

We recommend that you consult with and rely on your own tax and legal advisors
for counsel about the concepts presented in these materials. Neither the insurer
nor the agent may give you legal or tax advice.

May 8, 2008, 2:49pm Page 8 of 8

 AIG American General

Buy-Sell Funding with Life Insurance

ContinUL Extend 2007 Supplemental Illustration
A Guaranteed Universal Life Insurance Policy

The illustrated values are not guaranteed. They assume that scales for interest and cost of insurance rates will continue
unchanged by the Company for all years shown. This is not likely to occur because interest and cost of insurance rates
are subject to change by the Company based on various factors such as claims, investment experience, persistency,
expenses, taxes, and the overall economic environment. Actual results may be more or less favorable than those shown.
Please review the corresponding basic illustration for guaranteed values and other important information, and the notes
following this supplemental illustration. Values shown may not appear exact due to rounding.

American General Life Insurance Company and its representatives do not give tax or legal advice. This marketing
concept is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other
interested parties must consult with and rely on their own independent advisors regarding their particular situation and
the concepts presented here. Neither the insurer nor your agent may give you legal or tax advice.

This supplemental illustration is not complete without all numbered pages and the underlying basic illustration.

Presented to: Client Name

Presented by: Producer Name

May 8, 2008, 2:50pm Page 1 of 5

 AIG American General

Buy-Sell Funding with Life Insurance

Can You Really Afford a $1,000,000 Liability Today?

Assumptions for Client Name

Initial Liability: $1,000,000
Forced Sale Asset Value Loss: 15%
Net Cost of Money: 5.25%
Bank Loan Interest Rate: 8%
Length of Bank Loan: 10 years

Pay Cash... at $1.18 on the Dollar?

Paying cash sounds easy, but this method may require the forced sale of assets.

If stocks, bonds, or real estate are forced to be sold at a loss of 15%, $1,176,471 of total
assets must be sold to fund your liability.

Any assets forced to be sold will no longer be available to your family for their use or for the
production of income.

Borrow... at $1.46 on the Dollar?

With this method, the amount paid to fund your liability includes both principal and interest on
the loan.

Assuming a 10-year loan at 8%, the payments for this liability will total $1,455,931,
including $455,931 of interest.

Will the monthly payment of $12,133 to repay principal and interest over the next 10 years
create a financial hardship?

This method also assumes that a lender is willing to loan you $1,000,000. Is your lender lined up?

The Life Insurance* Solution... only $0.01 on the Dollar!

The initial death benefit is $1,000,000. The cost per $1.00 of benefit is $0.01 in year 1.

Even over a 10-year period, the cost per $1.00 of your life insurance coverage is only $0.09.

After 10 years, if you should elect to surrender your life insurance coverage, you may
receive $25,689 before taxes from the policy values and your net cost may be $68,040
based on the adjusted life insurance cost. (See Funding Analysis report.)

*Subject to the availability of insurance coverage. Based on information and estimates provided by the client. Please refer to the
important notes on the last page of this section. This supplemental illustration is not valid without all numbered pages and the
numeric analysis and definitions in the summary reports. The figures are based on Current rate: 4.55%.

We recommend that you consult with and rely on your own tax and legal advisors for counsel about the concepts presented in these
materials. Neither the insurer nor your agent may give you legal or tax advice.

May 8, 2008, 2:50pm Page 2 of 5

 AIG American General

Buy-Sell Funding with Life Insurance

For Client Name

How Much Will It Really Cost?

Funding Cost per Dollar by Method

Your funding liability is anticipated to be about
2.0
$1,000,000. The real cost of funding this potential
future liability may be far more than you imagine.
1.6

1.2 If you were to pay this liability in cash, you may

1 5 9 13 17 21 25 29 33 37 41 45
Funding Year / Cost to Fund $1 of Liability
Funding Cost for Borrowed Funds
Funding Cost for Cash with Liquidation Loss
Funding Cost for Life Insurance
lose as much as 15.00% of your asset values because
0.8 of a forced sale. The stock market may be down
or real estate prices depressed. The bottom line
0.4 is that you will lose more than just the cost of the
liability—and you will lose it immediately.
0.0
49 53
Alternatively, a bank loan payment includes both
an interest portion and a payment of principal. Over
a 10-year period with a 8.00% loan, total loan payments
would be $1,455,931.
The funding cost using life insurance starts low
and slowly grows over time. Seldom does it ever
exceed your total funding liability.

Total Cost of Funding by Method

If you use a life insurance policy to fund your liability,
the initial premium would be $6,998. After 10 2,090,000

years, the total cost has only grown to $69,980.

1,672,000
This is still small in comparison to the total cost of
liquidating assets or borrowing. It takes many years
1,254,000
before the total premiums paid toward a policy would
ever approach the total liability you might need
836,000
tomorrow morning.
418,000
And if the liability were to somehow disappear, you
could always choose to surrender your life insurance 0
policy. In later years you would generally recover more 1 5 9 13 17 21 25 29 33 37 41 45 49 53
Funding Year / Total Cost in Dollars
than the total premiums you paid into the policy.

Total Cost of Borrowed Funds

Total Cost of Cash with Liquidation Loss
Total Life Insurance Cost
Please refer to the important notes on the last page of this section.
This supplemental illustration should not be used to project or predict future performance.
This supplemental illustration is not valid without all numbered pages and the numeric analysis and definitions in the summary reports.

May 8, 2008, 2:50pm Page 3 of 5

 AIG American General

Buy-Sell Funding with Life Insurance

For Client Name

Funding with Life Insurance

1,000,000

800,000

600,000

400,000

200,000

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Policy Year / Amount in Dollars
Death Benefit Cumulative Policy Premium
Effective Net Out-of-Pocket Cost *

Cumulative Effective Net Death

Policy Out-of-Pocket Benefit Cost per Dollar
Year Premium Cost* of Death Benefit
1 $ 6,998 $ 7,365 $ 1,000,000 $ 0.01
2 13,996 15,117 1,000,000 0.02
3 20,994 23,277 1,000,000 0.02
4 27,992 31,864 1,000,000 0.03
5 34,990 40,902 1,000,000 0.04
6 41,988 50,415 1,000,000 0.05
7 48,986 55,632 1,000,000 0.06
8 55,984 59,450 1,000,000 0.07
9 62,982 63,572 1,000,000 0.08
10 69,980 68,040 1,000,000 0.09
11 76,978 71,870 1,000,000 0.11
12 83,976 77,171 1,000,000 0.12
13 90,974 82,972 1,000,000 0.13
14 97,972 88,419 1,000,000 0.15
15 104,970 95,714 1,000,000 0.16
* This column represents the Cumulative Policy Premium adjusted by an after-tax rate of 5.25% less the Cash
Surrender Value. (See Funding Analysis report.)
The purpose of this chart is to show how the ContinUL Extend 2007 policy works in conjunction with the Funding with Life Insurance concept.
This supplemental illustration should not be used to project or predict future performance.
This supplemental illustration is not valid without all numbered pages and the numeric analysis
and definitions in the summary reports. The figures are based on Current rate: 4.55%.

May 8, 2008, 2:50pm Page 4 of 5

 AIG American General

Buy-Sell Funding with Life Insurance

For: Client Name

Important Notes

This presentation is not valid unless accompanied by the Funding Analysis

and Comparison of Funding Methods Reports.

Policy loans and withdrawals will reduce cash value and death benefit.
Policy loans are subject to interest charges. If your policy is a modified
endowment contract, loans and withdrawals may be subject to taxes
and penalties.

Death benefits and cash value increases may be subject to the alternative
minimum tax which may cause taxes and penalties.

Important: Liability funding techniques may vary depending on the needs

of the parties.

The illustrated values are not guaranteed. They assume that scales for interest and cost of insurance rates will continue
unchanged by the Company for all years shown. This is not likely to occur because interest and cost of insurance rates
are subject to change by the Company based on various factors such as claims, investment experience, persistency,
expenses, taxes, and the overall economic environment. Actual results may be more or less favorable than those shown.
Please review the corresponding basic illustration for guaranteed values and other important information, and the notes
following this supplemental illustration. Values shown may not appear exact due to rounding.

American General Life Insurance Company and its representatives do not give tax or legal advice. This marketing
concept is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other
interested parties must consult with and rely on their own independent advisors regarding their particular situation and
the concepts presented here. Neither the insurer nor your agent may give you legal or tax advice.

This supplemental illustration is not complete without all numbered pages and the underlying basic illustration.

May 8, 2008, 2:50pm Page 5 of 5