A buy-sell arrangement is an agreement in which each business owner agrees to buy the interest of the others in the event of death, disability, or retirement.
In a buy-sell arrangement the owners must agree amongst themselves on a business continuation plan. Each owner agrees to buy the others’ shares in the event of death or retirement.
In this arrangement, each owner purchases a life insurance policy on the other. For example, if there are three owners, then there are six policies. The formula for determining this number is the number of owners multiplied by the number of owners subtracted by one. Each owner will pay the premiums out of his or her personal funds. The premium payments are not tax deductible.
Why use life insurance? Life insurance is an excellent choice to fund a buy-sell arrangement because the death benefit proceeds will be received by the surviving partner income tax free. Life insurance also has the potential for tax-deferred accumulation. And when using life insurance, the value of the entity does not increase because the individuals own the contracts, not the business.
Buy-Sell Agreements Brochure