In the field of estate planning, buy-sell agreements can sometimes be used as a reaction to a rather challenging situation.
You may want to consider using a buy-sell agreement if you are a partner in a small business. This is a form of business continuation agreement that you enter into with the other partners.
In this post we will look at two different types of buy-sell agreements.
Cross Purchase Plan
One very simple and straightforward type of buy-sell agreement is the cross purchase plan. Before we explain the details, we should present a scenario that would call for the utilization of the cross purchase plan.
Let’s say that you are a partner in a small business, and you do not have anyone in your family who would want to assume your role in the business after you pass away. You have a number of children, and you have extended family that you would like to provide for after your passing.
Your share in the business is quite valuable; in fact, it is your most valuable asset. Ideally, you would like to arrange for the liquidation of your share so that the value of your interest in the business could be distributed among multiple people after you die.
How do you extract your share of the business without negatively impacting the surviving partners? This is where the cross purchase plan comes in.
The business partners get together to determine the value of a share of the business. Once this has been determined, each partner takes out a life insurance policy on every other partner. This would be a cross purchase.
When one partner dies, the combined insurance policy proceeds are used by the surviving partners to purchase the share that was owned by the deceased partner from his or her estate. The surviving partners can continue to run the business without hardship or interruption, and there is liquidity that can be spread among multiple heirs.
Entity Purchase Plan
There is another type of buy-sell agreement that is very similar to the cross purchase plan called the entity purchase plan. This plan also involves the purchase of life insurance policies on the co-owners, but the business entity itself purchases the policies.
After the death of one partner, the policy proceeds are used to buy the share that was owned by the deceased partner.
Free Business Succession Planning Consultation
A buy-sell agreement can be a good solution for some small business owners, but the optimal plan will depend upon the circumstances. If you would like to discuss business succession planning with a licensed and experienced estate planning attorney, contact us through this website to request a free consultation.
