A chief concern among business owners is what will happen upon the death of one of the owners, and how will it affect the business, the other owners and the heirs of the deceased owner. Surviving owners want to ensure the continuity of ownership, and not risk having a large share of ownership fall into the hands of potentially inexperienced heirs of the deceased. In addition, they want to protect themselves and the company financially. On a personal level, owners want to also ensure that their family is financially secure and compensated fairly in case something happens to them.
A buy-sell agreement can address all of these concerns. It is a contract among business owners which, upon the death of one of the owners, requires the remaining owners or the company itself to purchase the deceased’s interest in the company according to the agreed upon terms of the contract. In addition, the deceased’s heirs are required to comply by selling their inherited interest at the previously agreed upon price.
Funding a Buy-sell Agreement
There are various options for funding a buy-sell agreement, but some carry more risks than others. Some owners choose either to save money now and pay cash or to take out a loan to buy out a deceased owner’s share in the company. Both of these situations can be financially risky, both for the surviving owner(s) and the company itself.
The smartest method for funding a buy-sell agreement is through life insurance. This ensures that funds are immediately available when a death occurs; plus, death benefit proceeds are generally income-tax free. In addition, the funds used to buy the deceased’s share are purchased for pennies on the dollar and the premiums will likely be significantly lower than the cost of repaying loan interest.
Conservation United understands the complexities of buy-sell life insurance policies and we are here to help you protect your business, your assets and your family. Contact us today!