[Narrator] Five tips for business buy-sell agreements.
If you own a business, there will inevitably be a day when your ownership interest will come to an end. It may happen when you gift the business to your children or sell it to a partner or third party. It may happen when you retire or upon your death. Whatever the reason, having a buy-sell agreement in place can help you maintain control over the details of the transfer of your ownership; the when, who, and how of it; and help avoid conflict between owners, legal entanglements, and disruption to the business.
Typically, a buy-sell agreement lays out the legal limitations and terms on future transfers of a business interest, including the price and timing, the events that will trigger a sale, any restrictions on transfer of a business interest, and other obligations or rights that owners may have regarding the transfer. You should work with your legal and tax advisors to implement an agreement that meets your specific goals. But to begin, here are five tips to help in designing a successful buy-sell agreement.
Tip number one: Clearly spell out each event that would trigger a transfer of your business interest. It could be the death or permanent disability of a business owner, termination of employment, divorce, loss of a professional license, or bankruptcy, to name a few examples.
Tip number two: Consider the rights and obligations that would be triggered by each event. For example, you could create an obligation that the owner's “shares shall be purchased,” or instead of an obligation, simply allow that “shares may be purchased.” Keep in mind that when it comes to the terms of a buy-sell agreement, there is a big difference between the words “shall” and “may.”
Tip number three: Establish a price or value before a triggering event occurs. This is a key to avoiding conflicts and may help ensure you receive a fair value for your business interest. It can take the form of a fixed price, a formula for determining the price, or you can rely on appraisers to make the valuation.
Tip number four: Consider where the funds will come from to purchase a business interest under the terms of the agreement. After all, if the necessary funds aren't available, it may be difficult to fulfill these terms. For an effective means of funding a required buyout, consider a type of cash value life insurance, such as indexed universal life insurance. In addition to its death benefit, indexed universal life insurance includes the potential to build cash value over time.
[On-screen disclosure] Policy loans and withdrawals will reduce the available cash value and death benefit and may cause unintended consequences, including lapse or taxable events. Please see full loan and withdrawal disclosure within this material for details. [End of on-screen disclosure]
This money can be accessed via loans and withdrawals for any purpose, such as providing funds to help in a buyout.
And finally, tip number five: Review your buy-sell agreement with your legal and tax advisors on a regular basis. As your business grows, additional owners are brought in, or your business or personal financial goals change, your agreement may need to change as well.
When properly designed, a buy-sell agreement can expedite the transfer of your business interest while avoiding conflict and complications, and help protect your family, your business partners, and you.
To discuss how a buy-sell agreement can fit your business succession goals, talk to your tax and legal advisors. To discuss how indexed universal life insurance could help fund these goals, contact your financial professional.
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Indexed universal life insurance policies require qualification through health and financial underwriting.
There is no guarantee that a policy will earn sufficient interest to support a loan strategy.
Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Withdrawals in excess of premiums paid will be subject to ordinary income tax. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. If a policy is a modified endowment contract (MEC), policy loans and withdrawals will be taxable as ordinary income to the extent there are earnings in the policy. If any of these features are exercised prior to age 59½ on a MEC, a 10% federal additional tax may be imposed. Tax laws are subject to change and you should consult a tax professional.
This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations.
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This content does not apply in the state of New York.
Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.950.1962.
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