Posted on March 31, 2006 at 07:58:04:
Business owners – and especially co-owners – can protect themselves and their families by setting up clear buy-sell agreements. It’s important that this formal document be in writing, detailing the seller and buyer, the event that will trigger the sale (death, retirement or disability of one owner, for instance) and terms of sale. It’s generally advisable that the terms of sale – essentially a valuation of the company – be updated annually to forestall disagreement or challenge by the IRS.
These agreements can be cross-purchase structures, where one owner is required to buy out the interest of the other, or redemption, when the company will buy out the interest of the departed owner. Another option gives co-owners the right of first refusal: they can buy, but they are not obligated to.
If the buy-sell agreement depends on life insurance to fund the buyout, it’s unwise to use an existing policy.