A wait-and-see
buy-sell agreement is a hybrid agreement that is implemented
by the owners of a business to facilitate the orderly transition
of a business interest in the event of the death, disability
or retirement of an owner. With a wait-and-see plan, the
business owners delay the selection of an entity plan or
cross-purchase buy-sell plan until the actual death, disability
or retirement of an owner. If one of these events occurs,
both the company and the business owners agree to purchase
the remaining business interest at a pre-determined priced
based on the company valuation set forth in the agreement.
The company has the initial option to purchase the available
business interest. A second option to purchase any remaining
interest then goes to the business owners themselves. Any
remaining business interest must then be purchased by the
company.
 How
Does a Wait-and-See Buy-Sell Plan Work?
Advantages
of a Wait-and-See Plan
Disadvantages
of a Wait-and-See Plan
Wait-and-See
Buy-Sell Agreements and Taxes
How Does a Wait-and-See Buy-Sell Plan Work?
Wait-and-see buy-sell plans customarily use life insurance
as a funding method due to its flexibility and efficiency.
In a wait-and-see plan, each business owner purchases a
life insurance policy on the life of each of the other
business owners in an amount equal to his percentage of
each business owner’s interest. If a business owner
dies, the remaining owners receive the proceeds of the
insurance policy on the life of the deceased partner. At
this point, the company has the option to purchase any
business interest from the deceased owner’s estate
(an entity plan). Any remaining business interest can be
purchased by the surviving owners based on their percentage
of ownership interest set forth in the agreement (cross-purchase
plan). Any shares not redeemed by the owners must be purchased
by the company. In most cases, each surviving business
owner contributes the proceeds received from the life insurance
to fund the corporate redemption. The deceased owner’s
estate receives instant liquidity at a fair market value
for their business interest.
Advantages of Wait-and-See Plans
A properly drafted wait-and-see
buy-sell agreement funded with life insurance will have
the following advantages:
1.
|
Creates all the advantages of a cross-purchase
buy-sell agreement. |
2.
|
Company ownership may be structured in equal terms
or any other desired proportion based on the terms of
the agreement |
| 3. |
Creates an instant market for the business at a pre-arranged
fair market value. |
4.
|
May establish a useable fair market value for the business
for estate tax purposes. |
5.
|
There is a “step up” in basis. Through either approach the remaining
owners cost basis for their respective business interests is increased. |
6.
|
Provides liquidity for the deceased owner’s estate. |
Disadvantages of Wait-and-See Plans
The disadvantages of wait-and-see buy-sell agreements include:
1.
|
Life insurance policies are not owned by
the business so any cash values cannot be considered
company assets. |
2.
|
Depending on the varying ages of the business owner’s
actual premium payments may vary greatly. |
| 3. |
Requires more policies that a stock redemption plan
therefore is more difficult to administer. If more than
3 owners, the number of policies required may get excessive.
For example, if there are 6 business owners, 30 policies
will be required. |
4.
|
May be difficult to come to agreement on and make effective. |
5.
|
Policy cash values are subject to the personal creditors
of the business owner |
Wait-and-See Buy-Sell Agreements and Taxes¹
Tax issues with wait-and-see plans include:
|
|
Life insurance policy premiums are not
tax deductible. |
|
|
Death benefit proceeds received by the business owners
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
receive an increase in their cost basis for tax purposes. |
A wait-and-see buy-sell agreement
funded with life insurance will assure an efficient transition
for your business. Without an established funded plan, in
the event of a business owner’s death, your business
may experience major problems dealing with deceased family
members, IRS issues and potential litigation. Don’t
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 Wait-and-See Plan
For Additional Information on Business Continuation Planning
see:
¹ Neither MEG Financial nor any
of its licensed agents provide legal or tax advice. For
appropriate
guidance, please
consult your attorney, CPA or tax advisor for legal or tax questions
relating to your specific circumstances.
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