Business Succession Planning
Chief concerns among business owners are what will happen upon the death of one of the owners, how will it affect the business, and protecting the other owners and heirs of the deceased owner.
A buy-sell agreement can address all of those concerns. It is a contract among business owners, that when 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 agreed upon terms in the contract.
A buy-sell agreement can be funded through a life insurance policy. Ensures the funds are immediately available to buy the deceased ownership in the company, and death benefits are generally tax-free.
Types of buy-sell life insurance include the following:
- Cross Purchase Plans: The owners enter into an agreement with each other. Each owner purchases a life insurance policy on the other owners, and will be named the beneficiary of the policy. Upon the death of an owner, each surviving owner receives life insurance proceeds income-tax free and proceeds to purchase the deceased’s business interests, while the heirs receive an agreed-upon payment for their business interest.
- Entity Plans: Also known as a stock redemption plan, the company purchases life insurance policies on each owner, with the company itself as the beneficiary. When an owner dies, the company receives the life insurance proceeds and uses proceeds to purchase the deceased’s business interest, while the heirs receive an agreed-upon payment for their business interest.