Buy-Sell Agreements

A buy-sell agreement is a formalized business continuation plan that is designed to provide for the orderly disposition or continuation of an individual’s ownership in a business.

There are two basic types to consider:

• The Cross-Purchase Agreement
• The Stock Redemption

The buy-sell agreement allows the holder of a business interest to enter into an agreement that will provide for the future sale of that interest should death, disability or retirement occur.

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Under the terms of the buy-sell agreement, the specified buyer is legally obligated to purchase the interest, and the interest holder or his/her estate is legally obligated to sell the interest upon the occurrence of one or more specified events.

A properly structured business continuation agreement has many advantages. It can:

• Control the value of the business for estate tax purposes and the estate taxes due on the assets
• Ensure the continuity or orderly disposition of the business
• Protect the surviving owners from gaining an undesirable co-owner (such as a member of the deceased interest holder’s family)

What Is a Cross-Purchase Agreement?

Under the Cross-Purchase Agreement, each interest holder agrees to buy the interests of the other owners under the terms of the agreement. A straightforward Cross-Purchase Agreement works well for a smaller business where there are fewer than four owners.

Typically, with this arrangement, the co-interest holders personally own life insurance policies on the lives of each of the other interest holders. This generally becomes too complex when dealing with a large number of owners.

Funding can also be cumbersome, confusing, and potentially more expensive. These difficulties have led to the creation of other types of Cross-Purchase Agreements.

One example is a Trusteed Cross-Purchase Agreement involves the creation of either a revocable or irrevocable trust. The trustee would be responsible for:

• Handling all the paperwork
• Owning and maintaining the life insurance policies
• Ensuring parties fulfill the terms of the buy-sell agreement

A Trusteed Cross Purchase Agreement can streamline the agreement and eliminate complexity and expense.

Following are some advantages of a Cross-Purchase Agreement:

• The surviving interest holders receive a step-up in basis equal to the price they paid for the withdrawing or deceased owner’s shares.
• Policy cash values are available to the owners, because they personally own the policies on each other’s lives.
• The incorporated business does not have to own a life insurance policy to fund the agreement, thus avoiding any corporate alternative minimum tax on the death proceeds.