BUY-SELL AGREEMENTS A Buy-Sell Agreement can provide for the orderly disposition of a closely held business interest at the death or disability of the owners. Buy-Sell Agreements have many advantages, including: 1. Can be useful in establishing the value of a business for Federal Estate Taxes. 2. Help transfer ownership of the business to the other shareholders or partners. 3. Provide the heirs with a buyer for the deceased's interest. This is especially important to the heirs where the deceased owned a minority interest. 4. Cash to buy out the deceased or disabled owner's interest can be provided through funding of the agreement with life insurance. BUY-SELL AGREEMENTS FOR CORPORATIONS A shareholder in a closely held corporation will be well advised to plan for the orderly disposition of his or her interest at death or disability. Without proper planning, many problems can face the executor or heirs of the deceased shareholder. Some of these are: 1. If decedent held a minority interest, what would the heirs do with the stock? Would the corporation or majority shareholders buy the deceased's interest, and if so, at what price? Since small companies usually don't pay dividends, the financial future and income of the deceased's family may be jeopardized. 2. If the decedent was an equal owner, the heirs will have a vote equal to the surviving shareholders who are active in the business. Heirs may want dividends paid to provide income, but the other shareholders may want to plow back profits to help the business grow. A conflict of interest often is the result and can lead to costly litigation. 3. If the decedent held a majority interest, would the surviving shareholders be able to afford a buy-out? If any buy-out payments are notes, will the minority shareholders be able to run the business successfully and pay off the notes? 4. If the decedent owned all the stock, who would buy it from the estate? Possibilities could include a key man or woman now active in the business, or a competitor. What price would be paid, and where would the money come from? These potential problems can be taken care of during life by execution of a binding, arm length Buy-Sell Agreement. 1. The deceased's heirs will receive a "pre-negotiated" price for the deceased's interest and will not have to worry about the future success of the business. 2. The buyer(s) of the deceased's stock can have complete control of the business; all future decisions can be made without interference from the deceased's family. 3. The value of the deceased's stock and purchase terms is agreed upon by all parties in advance of the death of a shareholder. 4. If the agreement is funded by life insurance, income tax-free cash is available at once to purchase the deceased's stock. 5. The agreement also can provide for the event of an owner or shareholder's disability and funds can be made available through disability insurance coverage. There are two basic types of Buy-Sell Agreements. There are advantages and disadvantages to each. A person trained in these matters, or an attorney or accountant should be consulted.
|
