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Funding a buy-sell agreement through Life or Disability insurance

Life & Disability Insurance as part of a buy-sell agreement
Having a fully funded buy-sell agreement in place at the time of death or disability can provide for the quick sale of a business interest which can spare the owners family the worry about how to pay the taxes due from the value of the business. The most common sources of funding for these events are a life insurance or disability insurance policy on each of the owners.

Impact of Taxes:
Generally, federal estate taxes come due within 9 months after a persons death. In some states the death tax are due even sooner than that. If your estate owes taxes, the person or agent appointed as executor of your estate will need enough cash to pay them. Unless enough liquid assets are available or the business can be converted to cash or used as colateral for a loan to pay the taxes, a life insurance policy should be considered for creating the necessary liquidity.

For federal estate tax purposes, the buy-sell agreement must be structured as an arm's length agreement providing for a fair price to be paid. Some fairly recent changes to the estate tax rules have made this a bit more challenging.

Non-death funding
A Buy-Sell Agreement may also be structured to provide for installment payments from the buyer to the seller. Some of the most common sources for this type of funding are:

Cash flow from the business:

Cash value life insurance policy can also be used to provide cash to the buyer in the event of retirement.

 

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