A stock redemption
or entity buy-sell agreement is a binding agreement that
is implemented by the owner’s of a business to facilitate
the orderly transition of a business interest in the event
of the death, disability or retirement of a business owner.
With a stock redemption plan, the company agrees to purchase
the interest of a business owner in the event that her business
interest becomes available due to death, disability or retirement.
The entity agreement outlines the terms of the sale and establishes
a formula for determining the actual sales price of the stock
based on the company’s valuation. It also obligates
the company to purchase the departing owner’s shares
while at the same time mandating that the departing owner
or her heirs sell their business interest back to the company.
 How
Does a Stock Redemption Buy-Sell Plan Work?
Advantages
of Entity Plans
Disadvantages
of Stock Entity Plans
Stock
Redemption Buy-Sell Agreements and Taxes
How
Does a Stock Redemption Buy-Sell Plan Work?
Life insurance is the most convenient, effective and economical
tool for funding a buy-sell plan. In a stock redemption
plan funded by life insurance, each business owner is party
to an agreement where the business purchases a life policy
on the life of each business owner in an amount equaling
their respective business interests. The company is the
premium payer, policy owner and beneficiary of each of
the policies. In the event an owner dies, the company receives
the proceeds of the life insurance policy and uses the
proceeds to purchase the deceased owner’s business
interest at a previously agreed upon price. The deceased
owner’s estate receives instant liquidity at a fair
market value for their business interest.
Advantages of
Entity Plans
A properly drafted entity buy-sell agreement that is
funded with life insurance will have the following advantages:
1.
|
Creates a binding plan for the efficient
transition of a business interest in the event of an
unforeseen death. |
2.
|
Easy to implement and cost effective. |
| 3. |
Creates an instant market for the business at a
pre-arranged fair market value. |
4.
|
Policy cash values can be listed as an asset on
the company’s balance sheet. Cash values may be
accessed by the company for other business uses. |
5.
|
May establish a useable fair market value for the
business for estate tax purposes. |
6.
|
Only one life insurance policy is required for each
business owner. |
7.
|
Business owners are not responsible for premium
payments. |
| 8. |
Provides liquidity for the deceased owner’s
estate. |
Disadvantages of Entity Plans
The disadvantages of entity buy-sell agreements include:
1.
|
There is no step-up in basis. If a business
owner dies, each owner’s business interest increases
but their basis remains the same. |
2.
|
Life insurance may be the alternative minimum tax |
| 3. |
Policy premiums are not deductible. |
4.
|
Policy cash values are subject to the creditors of
the business. |
Stock Redemption Buy-Sell Agreements
and Taxes¹
Tax issues with stock redemption plans include:
|
|
Life insurance policy premiums are not
tax deductible to the business. |
|
|
Any death benefit proceeds received by the business
are generally received income tax free. |
|
|
If the business is properly valued, the value defined
in the buy-sell may likely be binding when calculating
the estate tax value for income and estate tax purposes. |
|
|
Once a deceased owner’s shares are purchased,
the remaining owner’s do not receive an increase
in their cost basis for tax purposes. |
Effective use of a properly funded entity buy-sell agreement
will assure an efficient transition for your business.
Without an established funded plan, your business will
experience significant costs if a fellow business owner
dies unexpectedly. Why wait till it is too late to plan?
Call MEG Financial today at (877)
583-3955 to discuss
your business continuation concerns. A licensed insurance
agent can personally review your circumstances and help
you uncover potential options for your business.
Request a Life Insurance Quote to Fund a Stock Redemption
Plan
For Additional Information on Business Continuation Planning
see:
¹ Neither MEG Financial
nor any of its licensed agents provide legal or tax advice.
Please consult your
CPA or tax
advisor for tax questions relating to your specific circumstances.
|
