life insurance buy sell agreements
If you own a business, odds are the business represents a sizable portion of its assets. Therefore, planning for the provision order of business is an important consideration in planning.
The most basic elements of the plan involves the use of a buy-sell agreement. It's amazing how many business owners have an agreement of sale. Even more surprising is the number who have one, but have no method to fund it. Let's look at the logic of a funded buy-sell agreement.
Create a market
Most businesses are closely guarded. A person can not call your broker and buy shares in the company. In essence, there is no market for the business.
If the business is a sole proprietorship or a man or a corporation of the woman, who will buy the business when the owner dies? In rare cases, a family member may be able to intervene and successfully continue the business. Most times, companies simply close their doors.
If the owner of the company is a partner or minority shareholder in a company where is the financial motivation for the other owners to buy a minority interest? A buy-sell agreement between partners of the person, or one by one or more employees key to the sole owner, creates a market for the business.
Avoid a new partnership with the heirs
In my experience there is no faster way to get the attention of a business owner male regarding succession planning for companies to ask two questions.
"You and his partner have a buy-sell agreement? "
"No."
"If your partner died, would you like to be in business with his wife? "
Silence.
When a partner dies, and the dust settles, generally one of two things happens. The woman called her husband and partner requests that your check payment has been over the last month. The partner has to explain that her husband's salary was the result of their active participation in business, are not bound solely the fact that owning shares in the company.
The second possibility is the wife who has no experience or participation in the company, assumes the position of her husband.
A buy-sell agreement prevents these scenarios.
Fixed price
Assuming buyers surface, what is the value of the interests of the deceased owner? If the seller owns the deceased's family, who want as much as you can get. The remaining partners want to pay what minimum. Often, the dollar amount is far apart.
By setting a price that everyone is happy with life span, no haggling over the price of death. Moreover, this "pegs" the value of the company for property tax purposes. In the absence of an agreement, lists of goods a value to the statement property tax, if necessary. The IRS often comes back with their valuation opinion: a much larger amount. What follows is a back and forth argument, involving attorney's fees and stress. Some of these cases have lasted up to ten years.
Converts an Illiquid Asset to Cash
Funding adequate buy-sell agreement instantly converts bricks, mortar and steel into cash. This provides funds for the heirs to pay obligations and taxes. Money cash can be invested to generate income, cash is easily divided among heirs.
Financed with Life Insurance
Assuming that an agreement of sale is drafted, the next question becomes "Where will funds come from the obligation now mandated the sale and purchase agreement?" There typical three options.
1. Pay cash. This is only an academic choice. Most companies do not have cash in such amounts that way.
2. Buy in time. If the business interest is worth $ 500,000, the agreement is to pay, for example, $ 50,000 plus interest over 10. The negotiations could be difficult. The family wants their money as quickly as possible and the remaining owners want to string you out for so time as possible.
This option is expensive. It takes the survivors to pay principal and interest. The payments put a mortgage on future earnings and have to mangle taxes. The result is paying much more than a dollar for every dollar of business interest purchased.
3. The Fund agreed with life insurance. This is the "discounted dollar" method. The money is immediately available to finance the deal, and the total premium in the policy get very far from the amount received.
If you own a business and not have a buy-sell agreement, in effect, call your life insurance agent, lawyer and accountant. Organize a meeting, with a value we have developed an agreement, and the background with a life insurance. You probably have devoted his life to put your business together. Now assign a couple of hours together to maintain their heirs and circumventing a myriad of problems.
About the Author:
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, “The Estate Preservation Advisor”. For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, “How to Sell Your Life Insurance Policy for More than the Cash Value”, go to http://theestatepreservationadvisor.com/rd/subscribe.htm
Article Source: ArticlesBase.com – The Buy-sell Agreement: Why it is the Simple Solution
