Protect your family and employees with a business continuity plan

A stock redemption or entity buy-sell agreement is a binding agreement that is implemented by the owners of a business to facilitate the orderly transition of a business interest in the event of the death, disability or retirement of a business owner. With a stock redemption plan, the company agrees to purchase the interest of a business owner in the event that her business interest becomes available due to death, disability or retirement. The entity agreement outlines the terms of the sale and establishes a formula for determining the actual sales price of the stock based on the company’s valuation. It also obligates the company to purchase the departing owner’s shares while at the same time mandating that the departing owner or her heirs sell their business interest back to the company. Life insurance is the most convenient, effective and economical tool for funding a buy-sell plan. In a stock redemption plan funded by life insurance, each business owner is party to an agreement where the business purchases a life policy on the life of each business owner in an amount equaling their respective business interests. The company is the premium payer, policy owner and beneficiary of each of the policies. In the event an owner dies, the company receives the proceeds of the life insurance policy and uses the proceeds to purchase the deceased owner’s business interest at a previously agreed upon price. The deceased owner’s estate receives instant liquidity at a fair market value for their business interest.

A cross-purchase buy-sell agreement is a written and binding agreement wherein each business partner or shareholder individually agrees to purchase the interest of a partner/owner if one of the conditions that triggers the agreement occurs. Triggering events generally include the death, disability or retirement of a business owner or otherwise sale of a shareholder’s interest. The agreement outlines the terms of the sale and establishes a formula for determining the actual sales price of the stock based on the company’s valuation. It also obligates the remaining business owners to buy the departing owner’s shares of the company based on each owner’s individual percentage of interest outlined in the agreement. As part of the agreement, the departing shareholder, or her heirs, is also obligated to sell her interest in the company. With a cross-purchase plan, the company is not a party to the agreement. Using life insurance to fund a cross-purchase plan, each business owner purchases a policy on the life of each of the other owners in an amount equaling their share of the purchase price of the insured owner’s interest. Each business owner is the policy owner and beneficiary of each of the policies on the lives of the other owners. In the event an owner dies, the remaining business owner’s receive the proceeds of the life insurance policies and use these proceeds to purchase the deceased owner’s business interest at a previously agreed upon price. When a deceased owner’s interest is purchased, the surviving owners generally receive a “step up” in the cost basis of their business interest while the former owner’s estate receives instant liquidity at a fair market value for their business interest.