Unilateral Buy-Sell Agreement

E-mail Comment Del.icio.us Digg Reddit Technorati

Apr 3, 2009 Business Life Insurance

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.

Tags: buy-sell, buy-sell agreement, life insurance, unilateral buy-sell agreement

This entry was posted on Friday, April 3rd, 2009 at 2:06 am and is filed under Business Life Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

You must be logged in to post a comment.