Protect Your Most Valuable Asset
As a successful business owner, you have worked hard to reach your goals and it is probable that your business has become one of your most valuable assets. But, have you considered what would happen to your business and family should you unexpectedly die or become disabled?
- Do your heirs have experience operating the business on a day-to-day basis?
- Would your heirs be forced to sell the business?
- Would your heirs receive a fair price?
- Would the IRS seek a higher valuation for your business?
These are difficult questions to answer. You owe it to yourself and your family to protect your years of hard work. Through proper planning, you can secure the continuation of your business and the financial security of your heirs.
How Can You Protect Your Business and Family?
The Buy-Sell Agreement
When examining different strategies, it is important to select one that insures a smooth transition of ownership and protects your family's financial future. A buy-sell agreement can help you accomplish this goal.
A buy-sell agreement is a contract among business owners. At the loss of an owner, the business interest is transferred according to the terms of this contract. The other owner(s) are obligated to purchase the deceased's business interest and the deceased's heirs are obligated to sell. Just look at what a buy-sell agreement can do.
- Are free of business worries and guaranteed to receive a fair price for the sale of the business interest.
- May avoid some of the delays associated with probate.
- Will not have to worry about new and possibly unwanted partners.
- Know the purchase price of the business beforehand.
- Remain in good standing with clients and creditors through a smooth transition of ownership. Simply put, a properly funded buy-sell agreement will benefit your family, surviving owners, and creditors.
Methods of Funding Available
Option 1: Wait and Pay Cash
In this option, surviving owner(s) use cash at the death of a co-owner to fund the buy-sell agreement. But, several drawbacks to this method exist.
- At death, funds may not be readily available for payment.
- A savings plan accumulates funds over time. What if funds are needed tomorrow?
- Will a savings plan be depleted to pay for unforeseen expenses?
- Accumulation of cash may cause an accumulated earnings tax problem.
Option 2: Wait and Borrow Funds
In this option, surviving owner(s) borrow funds, usually bank loans, at the death of a co-owner to fund the buy-sell agreement. But, much like the first option, this method has drawbacks.
- Future growth may be slowed due to an increase in expenses (repayment of loan).
- Death of an owner may cause sales to decline, compounding the problem.
- Death of an owner may make it difficult to receive a loan.
- A surviving owner may have to sign for funds, exposing personal assets.
- Surviving owners pay dollar for dollar plus interest for the deceased's outstanding share of the business.
Option 3: Insurance: The Smart Choice
Purchasing insurance can be the most cost effective funding option for a buy-sell agreement. Using insurance as a funding vehicle will provide the following benefits:
- Immediate availability of proceeds when death or disability occurs.
- The funds used to buy the deceased's share are purchased for pennies on the dollar.
- Death benefit proceeds are generally income tax free.
- Premiums may be significantly lower than the cost of repaying the loan interest.
The Types of Buy-Sell Plans Available
What Will A Buy-Sell Agreement Accomplish?
- Creates a market for the stock.
- Sets a predetermined price at which owners agree to buy and sell their shares.
- Provides money to fund the plan.
Cross Purchase Plan
In this plan, owners enter into an agreement with one another. To fund this plan, each owner applies for, owns, and pays the life insurance premiums on the other owners.
When an owner dies
- Life insurance proceeds are paid to the surviving owner(s) income tax free.
- Proceeds are used to purchase the heirs' business interest.
- Heirs receive an agreed-upon payment for their business interest.
- Surviving owner(s) receive an increased cost basis for the acquired business interest.
In this plan, owners enter into an agreement with the business. The business applies for, owns, and pays the life insurance premiums on each owner.
When an owner dies:
- The business will receive the life insurance proceeds.
- The business uses the proceeds to purchase the deceased's business interest.
- Heirs receive an agreed-upon price for their business interest.
Stock Redemption Plan
A stock redemption plan is an agreement between the business and its shareholders. The corporation applies for, owns, and pays the life insurance premiums on each shareholder.
When a shareholder dies:
- The corporation will receive the life insurance proceeds.
- The corporation will use the proceeds to purchase the shareholder's outstanding stock.
- Heirs receive an agreed-upon price for the shareholder's outstanding stock.
Wait and See Plan
This buy-sell agreement provides an added level of flexibility, providing the advantages of the cross purchase and entity plans.
- The owner and the company form an agreement.
- The surviving owners/company have the option to purchase the deceased's business interest.
- If the option is not exercised, the other party is obligated to purchase the interest.
- Funding the agreement is usually the obligation of the party who has the first option.
- If necessary, loans between the two can be used to help a party who is underfunded.
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Consult an Agent:
At no charge to you, a New York Life Agent — professionally trained and experienced — can help you analyze your needs and recommend appropriate solutions through insurance and financial products and concepts. Request a no-obligation review with a New York Life Agent.
New York Life Insurance and Annuity Company does not provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.
|Buy-Sell: Insuring the Life of Your Business|