A key component of an integrated financial plan is planning for business succession. The business interest often
accounts for a substantial portion of the wealth the business owner has accumulated. Ensuring a plan is in place
for the eventual transfer of the business interest will help the business owner realize full value for the business
interest and will also help the business, and the remaining owners, survive the transition. This is particularly true
in the event of premature death.
Changes in ownership may create financial obligations on the part of the remaining owners, and may also have
income tax implications for the withdrawing owner and the remaining owners.
An integral part of the succession plan is to ensure financing is in place in the event of death to fund the
purchase and sale of the business interest. The succession plan should also provide the business owner with
sufficient liquidity to fund the related income taxes and, where possible, take advantage of any tax deferral or tax
minimization strategies that may be available.
In the case of closely held corporations or partnerships, one of the most important tools for implementing
the business succession plan is the shareholders’ agreement or partnership agreement. Once the business
succession plan is developed, an agreement can be drafted to reflect the needs and wishes of the various parties.
Life insurance is generally an efficient means of funding the obligation under a buy/sell agreement in the event of
the death of a shareholder or partner. There are numerous ways to structure a buyout on death and life insurance
funding plays an important role in ensuring the buyout occurs. In considering the various methods for structuring
a buy/sell agreement, it should be kept in mind that there is no “right way” to proceed. Each method has its own
‘pros’ and ‘cons’ and must be considered in light of the circumstances of a given situation.
In the corporate context an important threshold consideration is whether to fund the buy/sell arrangement with
‘corporate owned’ or ‘personally owned’ life insurance. The cross purchase method is generally funded using
personally owned insurance. The promissory note method, the share redemption method and the hybrid method
Buy-Sell Funding are funded with corporate owned insurance. Each structure has differing advantages from a tax perspective and
depending upon the facts one structure may be more favorable over another.
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