Buy-Sell Agreements: Good For Business and Good For Your Estate Plan
From unwanted business partners to burdensome estate taxes, the death of a business co-owner can have negative implications for surviving owners as well as for the estate of the deceased. A well drafted buy-sell agreement can do double duty as an important tool in both business succession and estate planning, helping to ensure the stability of the business and the financial security of the deceased’s loved ones.
What is a buy-sell agreement?
A buy-sell agreement is a legally binding contract that requires or allows remaining owners in a business to buy a departing owner’s interest in the business. The agreement can be triggered by any number of events, including the death, incapacitation, or retirement of an owner. The agreement can also come into play when a third party stands to gain an interest in the business because of bankruptcy, divorce, or attempted sale.
How can a buy-sell agreement help my business?
Buy-sell agreements protect you from being forced into business partnerships. A co-owner of your business might get divorced, retire, or pass away. She may even try to sell her interest to an outsider. Without a buy-sell agreement, any of these events could mean that you end up co-owning a business with a third party whether you like it or not. Former spouses, surviving spouses, heirs, and unknowns can all create instability in your business. A buy-sell agreement can remove the specter of instability and help ensure a smooth transition by, at the very least, giving you first dibs at buying back the departing owner’s interest.
How can a buy-sell agreement help my loved ones in the event that I die?
No one likes to plan for her own death, but proper planning can help ensure the financial security of your loved ones in the event of your death. If you co-own a business and pass away, your loved ones might find themselves dependent on the continued success of the business. Moreover, the remaining owners could take advantage of a need for liquid assets and undervalue your share of the business in a buyout. Once again, a buy-sell agreement can help. The agreement can provide your family with liquid assets to help pay estate taxes and other financial burdens that might exist, and because the value of your interest in the business is established in the agreement itself, you remove the risk of an opportunistic and undervalued buyout.
Additionally, establishing the value of your interest in the business in a buy-sell agreement can help minimize estate taxes in the event of your death. This can help avoid the forced sale of other assets in order to pay an unexpectedly large tax liability.
How are buy-sell agreements funded?
The buyout of a departing owner’s interest can be funded in a number of ways from cash on hand, to the sale of other assets, to life insurance payouts.
If you think a buy-sell agreement might be right for your business, discuss your options with a well-qualified attorney.