Cross-Purchase Buy-Sell Agreements: A Must-Have for Business Owners

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A cross-purchase buy-sell agreement is a legal contract that outlines how the ownership of a business will be transferred in the event that one or more of the owners die, become disabled, or retire. This type of agreement is important for business owners because it can help to ensure that the business continues to operate smoothly even in the event of a major change in ownership.

What is a cross-purchase buy-sell agreement?

A cross-purchase buy-sell agreement is a type of buy-sell agreement in which the remaining owners of a business agree to purchase the ownership interests of any owner who dies, becomes disabled, or retires. This type of agreement is often used by small businesses with a small number of owners.

How does a cross-purchase buy-sell agreement work?

A cross-purchase buy-sell agreement typically specifies the following:

• The triggering event(s) that will cause the agreement to go into effect, such as death, disability, or retirement.

• The purchase price of the ownership interests that will be transferred.

• The method of payment for the ownership interests, such as cash, life insurance, or a combination of both.

• The terms of the agreement, such as the length of time that the agreement will be in effect.

Why is a cross-purchase buy-sell agreement important for business owners?

There are a number of reasons why a cross-purchase buy-sell agreement is important for business owners. These include:

• It can help to ensure the continuity of the business. If an owner dies, becomes disabled, or retires, the business can continue to operate smoothly by transferring the ownership interests to the remaining owners. This can help to avoid disruptions in the business and protect the interests of the employees, customers, and creditors.

• It can help to avoid disputes among the owners. If an owner dies, becomes disabled, or retires, there may be disagreements among the remaining owners about who should purchase the ownership interests. A cross-purchase buy-sell agreement can help to avoid these disputes by specifying in advance who will purchase the ownership interests and how much they will pay.

• It can provide tax benefits. In some cases, a cross-purchase buy-sell agreement can provide tax benefits for the owners. For example, the purchase of the ownership interests may be eligible for a step-up in basis, which can reduce the amount of capital gains tax that is owed.

Conclusion:

A cross-purchase buy-sell agreement is an important legal document for business owners. This type of agreement can help to ensure the continuity of the business, avoid disputes among the owners, and provide possible tax benefits. If you are a business owner, you should consider having a cross-purchase buy-sell agreement in place.

Additional thoughts:

In addition to the benefits mentioned above, a cross-purchase buy-sell agreement can also help to protect the value of the business. This is because the agreement will specify the purchase price of the ownership interests, which can help to ensure that the business is not sold for less than its fair market value.

Another benefit of a cross-purchase buy-sell agreement is that it can help to provide liquidity for the owners. This is because the owners will be able to sell their ownership interests to the remaining owners in the event of a triggering event. This can be especially important for owners who are nearing retirement or who need to raise cash for other purposes.

If you are a business owner, you should consult with an attorney to discuss whether a cross-purchase buy-sell agreement is right for you. An attorney can help you to understand the benefits and risks of this type of agreement and can help you to draft an agreement that meets your specific needs. Additionally, for any tax related questions, be sure to consult your CPA, or tax professional.

Using Life Insurance for business succession planning

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When it comes to business succession planning, life insurance can be a valuable tool. This type of insurance can help to protect the value of your business in the event of your death, disability, or retirement. By using life insurance, you can ensure that your business will be able to continue operating smoothly in the event that you are no longer able to lead it.

There are a few different ways that life insurance can be used for business succession planning. One way is to use the death benefit to buy out the interests of other partners or shareholders. This can help to keep control of the business within the family or management team. Another way to use life insurance is to fund a buy-sell agreement. This agreement can provide funding to buy out the shares of a partner or shareholder who dies unexpectedly. Lastly, life insurance can be used to fund a key person life insurance policy. This type of policy can provide financial protection in the event that a key employee dies unexpectedly.

Using life insurance for business succession planning can help to protect your business from financial risk. By having this type of protection in place, you can ensure that your business will be able to continue operating even if you are no longer there to lead it.

Funding Buy-Sell Agreements with Life Insurance

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We understand the complexities of buy-sell insurance policies and we are here to help you protect your business, your assets and your family. One of the main concerns business owners have is what will happen if one of the owners passes away, how it will affect the business, the other owners, and the heirs.

In addition, surviving owners want to ensure continuity of ownership and avoid having a large stake fall into the hands of inexperienced heirs. They also want to protect their personal assets and the company's financial well-being.

Furthermore, owners want to make sure their families are financially secure and are fairly compensated in case of their death.

All of these concerns can be addressed with a buy-sell agreement. This is a contract between business owners that, upon the death of one of the owners, requires the remaining owners or the company itself to purchase the deceased's interest in the business according to the agreement. A deceased individual's heirs are also required to comply by selling the inherited interest at the previously agreed price.

FUNDING THE BUY-SELL AGREEMENT

There are a variety of options for funding a buy-sell agreement, but some are more risky than others. Owners may choose to save money and pay cash now or to take out a loan against the company's assets to purchase the shares of a deceased owner. Financially, both scenarios can pose a risk, both to the surviving owners and to the company itself.

Life insurance is the smartest way to fund buy-sell agreements. As a result, funds are available immediately when a death occurs, and the death benefit proceeds are generally tax-free. Also, the funds used to purchase the deceased's share are purchased for pennies on the dollar, and the premiums will likely be significantly less than the interest paid on the loan.

Types of buy-sell life insurance options include the following:

Entity Purchase Plan: With this type of agreement, also known as a stock redemption plan, the company purchases life insurance policies on each owner and names itself as the beneficiary. In the event of a business owner's death, the company is entitled to the proceeds of his or her life insurance policy and uses said proceeds to purchase the deceased's business interest, while the heirs are entitled to an agreed-upon payment for their interest in the business.

Cross Purchase Plans: An agreement between the owners is the basis of this type of plan. Every owner purchases a life insurance policy on the other owners, in which they will be named the beneficiaries. Each surviving owner receives income tax-free life insurance proceeds and uses those proceeds to purchase the deceased's business interests, while the heirs receive an agreed-upon payment for their ownership interest also.

As you see, there is a lot that can go into the proper succession plan of a business and there are various ways to plan for it. If you have further questions about how these life insurance plans work, please feel free to call or message us today.

Buy-sell Agreements, why are they important?

Do you and your co-owners have a strategy in place to transfer your business to the right people, at the right time, for the right amount of money? That’s what a buy-sell agreement allows you to do. Having a buy-sell agreement in place can help protect the future of your business.

A buy-sell agreement is an important aspect of your overall exit strategy. It helps create a market for the business when an owner dies, leaves the business, or becomes disabled. When structured correctly and funded with life insurance, and or disability insurance, a buy-sell agreement can help provide a solid start to your business exit plan and the people who depend on the future of your business.

Some of the key protection benefits of a buy-sell agreement includes:

Co-owner: Co-owners of the business get protection by providing them the opportunity and funding to purchase the business interest of a deceased, disabled, or a departing owner.

Business: Protect the business by preventing and/or limiting transfers to parties that might be unqualified or undesirable, by requiring certain restrictions.

Continuation: Minimize conflicts among owners by setting the price and terms of a sale when an owner leaves the business. Depending on the growth of your business, you may want to have the business valued every couple of years or so to be sure the buy-sell agreement has the appropriate funding in place.

Estate: Fix the value of your business interest for estate tax purposes if the price meets the IRS guidelines at the time the agreement was signed. Also, be sure to consult your accountant regarding all tax related questions. The estate tax limits can change.

Family: You and your family can be protected by having co-owners buy your interest in the business for a set price and providing them with the funding to do that if you die, become disabled, or leave the business.

Thank you for reading. For more information about how a buy-sell agreement funding option can work for you, please submit your information on our contact page, or call us today!

Top 5 Reasons You Need Life Insurance

OK, let’s talk. I know, talking about life insurance usually isn’t the most fun thing to talk about, but it is one of the most important aspects of your financial plan if not the most important. Talking with an expert regarding these matters can surely help lighten the load with what is needed to make a good decision in these matters.

I have been very lucky to know and meet a lot of absolutely wonderful people from all walks of life. And with knowing many people, your chances go up with knowing more people that have passed away. It is always hard to see friends and family stress about money during trying times like this. Seeing many of these types of circumstances is one of the many reasons why I chose to get involved in the life insurance industry. I am passionate about helping people get prepared, so when the unexpected happens, family and friends will not have the financial stress that comes shortly thereafter.

This article will outline just 5 of many reasons why you should have life insurance as part of your financial plan.

     1. Funerals aren’t cheap.

According to the most recent data from the National Funeral Directors Association, the average cost of a traditional funeral, including embalming and a metal casket, is almost $6,600. From my research, that represents a more basic casket. Most statistics out there say it is usually closer to $10,000 and in many cases higher. Most people don’t have an extra $6k-$10k or more to dedicate to funeral costs so they usually have to draw money prematurely out of a 401-k, savings, fundraise for it or go into debt paying for it. Don’t leave it to your family to deal with the added stress of coming up with money to pay for the funeral.

2. Take care of business.

Life insurance is a very important part of the small and large business equation. Having been a business owner throughout my life, I can relate with the stress of wondering what would happen if the unexpected took place. Ask yourself some of these questions: What would happen if a key employee dies or becomes disabled? What happens to my business and my family if I die? What happens with the structure of the business if a business partner dies? These are just a few things to think about when owning a business and to take the proper steps in protecting yourself and those dependent upon you.

3. Supplement retirement.

How do you supplement retirement with life insurance you may ask? Certain life insurance policies (Whole Life) in particular, have both a death and a living benefit. These types of policies can accumulate cash that can be borrowed at a later time for cash needs. These types of policies are also usually protected from creditors, have a premium payment that is guaranteed to never increase, tax-free access to your funds as well as a myriad of other features and benefits.

4. Peace of mind.

Having a life insurance plan gives you the piece of mind that whatever happens to you, that you have a plan in place to care for loved ones that are left behind. You can also allocate some of the proceeds to your favorite charity if you wish. Just knowing that business will be taken care of and that you are leaving a legacy behind is a good feeling to have.

5. Nobody gets out of this world alive.

My grandmother used to say this and it made light of a sad situation. With this obvious knowledge, it is nice to have a plan in place that will not only take care of funeral expenses, but also pay off debts, a mortgage, take care of rent for a couple of years, pay for a college education, and the list goes on. In addition, life insurance is usually a lot cheaper than you think.

Don’t hesitate on getting something set up to protect the people you love. It can make all the difference in the world.