The task of starting your own business is daunting in itself. But could you imagine having to trudge through that same process with your current business partner's 22-year-old son? Buy/sell agreements protect all of the key people in small businesses. One of the most prevalent concerns when it comes to implementing one of these agreements is how to fund it.
Funding a buy/sell agreement is best addressed by an insurance agent who knows the dynamics of the individual owners, the company, and the circumstances of the company. The agreement is designed to provide for the continuation of the business if something were to happen to one of the owners. Without one of these agreements, if one of the owners who put their blood, sweat and tears into the business passed away, the remaining business owner could find himself dealing with a new partner. In the event that the buy/sell agreement is in place and properly funded, the remaining business owner is financially capable to buy out the interest of the deceased partner's heirs.
The life insurance policies that are used to fund buy/sell agreements are owned by the company and name the company as the beneficiary. This structure presents no tax issue, because life insurance proceeds are not taxable as income. Each policy is separately underwritten on the life of the owner that is insured.
When funding a buy/sell agreement, some of the life insurance policies may be rather pricey, based on the individual set of circumstances of each life being insured. There are a variety of policy options available to make the price more suitable for the company's situation. Policies can range from a short term policy that will cover the amount of the buy/sell, to permanent policies that can include keyman provisions for the company. It is extremely important to consult a legal professional with respect to business succession planning and an experienced insurance agent to ensure that any planning in place is properly funded.
It is also important to review the planning and agreements that are in place on an annual basis. As your company changes and grows, your business succession planning needs to be dynamic to match. That demand makes having a group of professionals with whom you are familiar and comfortable, essential.