Let`s look at the pros and cons of a life insurance policy for your business: if you don`t have the answers to the top 3 questions many business owners face, this article is for you. This is not an end-of-the-world scenario; it is simply a glaring reality that entrepreneurs must face in the event of long-term death or disability. Could business partners, employees or your family afford to continue, or will your death deal a fatal blow to the company? A buy-and-sell contract funded by life insurance may be the bailout you need to put in place to avoid the potential financial problems that would ruin your business. This article is intended to give you a simple explanation of the concept of these contracts, not to provide legal advice. The information we give you should raise questions from your lawyer or tax specialist. A purchase and sale contract is a legally binding contract that defines how a partner`s participation in a business can be reassigned if that partner dies or otherwise leaves the business. Most of the time, the purchase and sale contract provides that the available share is sold to the remaining partners or to the partnership. In addition to controlling the business, purchase and sale agreements also define ways to assess a partner`s value. This may have opportunities to use shares outside of the issue of buying and selling shares. Yes, for example. B, a dispute over the value of the business or the interests of a partner arises between the owners, the valuation methods contained in the purchase and sale agreement would be used. A version of this article was originally published in the September 2019 issue of Thomson Reuters Estate Planning Magazine.
Purchase contracts are essential when it is a narrow transaction, but they are often ignored or briefly narrowed down by business owners. Life insurance is an effective tool for entrepreneurs to implement the provisions of a sales contract by providing cash to the company and its family in the event of the death of an owner. A properly drafted sales contract is the key to avoiding conflict and reminding you how life insurance revenues will be used in the event of the death of a business owner. The creation of a separate unit for life insurance is increasingly being used by practitioners in planning purchased contracts to avoid tax traps and other pitfalls. What is a sales contract? Generally speaking, a sales contract (which may be part of a shareholder agreement, a business agreement, a partnership agreement or another) is an agreement between the owners of a closely held transaction that limits the rights of owners to transfer their shares in the unit. Other owners and the business also generally exist, in a certain combination, the right (and sometimes the obligation) to acquire an owner`s interests if the owner dies or wants to make a lifetime transfer of his interests. As a result, a properly established sales contract may prevent the interests of a deceased contractor from being passed on to others who do not wish the remaining owners to be affected by the business, and it may also provide the estate of a deceased owner in terms of cash. Events that trigger a buy-and-sell contract can go beyond death and voluntary transfers for life. A possible involuntary assignment, such as a result of divorce or bankruptcy, may also trigger rights or obligations to purchase. Other events may include the owner`s permanent disability or the termination of an owner`s employment in the facility.
The buy-sell agreement defines how the value of a ceding owner`s shares must be determined. In some cases, the sales contract can only provide for an interest valuation on the date in question. In other cases, an evaluation formula may be indicated. In the latter case, it is particularly important that the repurchase agreement be re-examined