insuranceglobe.net » buy-sell http://insuranceglobe.net/learning_center Thu, 02 Feb 2012 23:57:27 +0000 en hourly 1 http://wordpress.org/?v=3.0.1 Unilateral Buy-Sell Agreement http://insuranceglobe.net/learning_center/unilateral-buy-sell-agreement/ http://insuranceglobe.net/learning_center/unilateral-buy-sell-agreement/#comments Fri, 03 Apr 2009 02:06:45 +0000 Admin http://insuranceglobe.net/learning_center/?p=197 This is a buy-out arrangement between a business owner and a third-party. At an owner’s death or departure, the third-party must buy his or her interest based on the terms of a written agreement between them. To fund the buy-out, the third-party buys a life insurance policy on the life of the owner.

When It Is Used

  • To help provide a guaranteed buyer for the sole owner of a business.
  • To provide security to employees and maintain creditor relationships by showing that business will continue upon owner’s death or departure.
  • To ensure that a specific non-owner (usually either a key employee or member of an owner’s family) can acquire ownership interest.

Where Life Insurance Fits

  • The third-party buyer is the owner, beneficiary and premium payer on a cash value life insurance policy on the life of an owner.
  • The policy owner may later be able to take loans and withdrawals from the policy to help pay for the buy-out of a retiring owner’s interest.
  • If an owner dies prior to selling his business interest, the policy owner can use the death benefit to pay for most or all of the interest to be acquired.

Advantages

  • Identifies a ready buyer and a method of determining the purchase price.
  • Helps assure heirs that they will receive a fair price for family’s business interests.
  • Assures both creditors and employees that business will continue after the death or departure of an owner.

Disadvantages

  • Parties are committed to the agreement even if circumstances change.
  • There are legal and accounting costs in establishing the arrangement, as well as costs to acquire and maintain a life insurance policy.

Key Tax Considerations

  • Death benefits paid under the policy to purchasing party, as beneficiary, are generally received income tax free.
  • Premium payments are not income tax deductible.
  • Cash value within a life insurance policy can often be accessed by the policy owner on a tax-favored basis to help provide buy-out funding.
  • The buyer’s cost basis in the business interest will be equal to the amount paid, assuming they pay fair market value.
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