Buy Sell plans typically come in 1 of 2 flavors with a number of derivations and off shoots.
Type 1 is a Cross Purchase Arrangement where joint business owners agree that upon the death of a business owner the remaining business owners agree to purchase the business from the estate of the deceased partner. The arrangement typically specifies the dollar value of the buy-out.
For example, Owner A and Owner B are equal owners in a company and execute a Cross Purchase arrangement. When A dies, B executes the Buy Sell agreement and writes A’s spouse a check for $1,000,000 and receives A’s stock. As owner of all stock, B holds 100% control of the company.
Type 2 is an Entity Arrangement where parties form an agreement with their company so that upon the death of an owner, the company will buy back the shares of the deceased party. Valuations are established in the terms of the arrangement.
For example, Owner A and Owner B, execute an Entity Arrangement with their company. A dies. Pursuant to the terms of the arrangement, the company writes A’s spouse a check for $1,000,000 and A’s spouse conveys A’s stock to the company. B as the sole remaining shareholder controls 100% of the stock in the company.
Because A and B do not want to tie up $1,000,000 in capital waiting for the day when either may die, A and B may seek to utilize life insurance as a funding mechanism.
In a Cross Purchase Arrangement, for example, A purchases a $1,000,000 life insurance policy on B and B does the same on the life of A. When A dies, B receives the death benefit of the policy insuring A’s life and uses the proceeds to write a check to A’s spouse.
In an Entity Arrangement, the company purchases separate policies insuring the life A and B. As owner and beneficiary of the policy insuring A, the company would be able to use the proceeds to write a check to A’s spouse and in exchange receive A’s shares upon the death of A.
Don Sweet, Esq., help clients decide which type of arrangement is appropriate and prepare the documents that establish the arrangement. Don works with clients’ life insurance agents to make sure that the life insurance transaction is integrated with the buy-sell planning. Don is available for a complimentary conversation about how such an arrangement might work and can be reached at 415-746-542.