If you're planning to fund your buy-sell agreement with life insurance, here are 7 best practices to keep in mind:
- If you're taking an appraisal approach to value the business, the buy-sell agreement should clearly outline how the life insurance death proceeds should be handled specifically in regards to the policies owned by the company.
- Ensure that the insurance is structured and that the employer is in compliance with all of the IRC Section 101(j) requirements to enable tax-free income from life insurance death proceeds.
- Clearly outline how the death proceeds of a life insurance policy that are in excess of the purchase price of ownership established by the agreement will be handled.
- If it appears that the business owners will have an estate tax liability upon death, it's in their best interests to use the buy-sell agreement to lock in the value of the business as this will help with the estate tax valuation.
- To make it abundantly clear that the proceeds for the life insurance policy will be used to complete a sale of ownership after the death of a business owner, the buy-sell agreement needs to include clear and concise language to create a strong, binding contractual obligation to purchase the ownership with the death proceeds.
- Be sure to include language in the buy-sell agreement that addresses the potential for future ownership changes and how life insurance policies will be acquired for the buy-sell agreement.
- Death, disability, and retirement are the three common reasons why a sale and mandatory purchase would take place through a buy-sell agreement. If there are any other events that need to be a part of the buy-sell agreement design, they should be clearly stated.
As a business owner, a buy-sell agreement is one of the most important legally binding agreements that you and your business partners will establish. At Summerlin-Roberts, we'd like to make this process as smoothly as possible for you. Please contact us to learn more about the benefits of funding a buy-sell agreement with life insurance.