WP Stevenson & Companies

Buy - Sell agreements are agreements between two parties that establish ground rules of just exactly how a business will be disposed of in the event of one of the party's death.

Example; Winston and John are business partners. Each plays a key role in the business. Because John is married to Teri and Winston is married to Millie; Winston and John need to be mindful of the implications of community property.

If John were to prematurely pass away, Winston would become business partners with Teri, because Teri still owns John's half of the business. Teri is by trade a Hair Stylist, and knows little about what John did. Winston would now have to do 100% of the work, and share 50% of the company earnings with his new non contributing partner.

The solution is to have an attorney draft up a Buy- Sell agreement, and fund the agreement with Life Insurance.

John would buy and own a policy on Winston, and be the beneficiary of said policy. Likewise Winston would buy a policy on John. He would be the owner, and beneficiary. Under the terms of the Buy- Sell agreement, at John's death Winston would receive the Life Insurance policy proceeds income tax free, and use these funds to Buy Teri's half of the business from her thus making Winston the owner 100%. Teri would be paid off and everyone would be financially indemnified.

I believe that anyone involved in a partnership should give serious consideration to this planning strategy.

Any readers out there that have what they consider to be Buy -Sell agreements are urged to review their ownership and beneficiary designations. All too often I find one partner owning a policy on himself with the other partner named as beneficiary. This could be a lethal tax mistake in that this would cause a Transfer for Value issue and therefore make the Life Insurance proceeds taxable to the estate of the deceased and cause income tax implications as well. Simply changing the ownership and beneficiary designations is not without peril either. If the changes are made, and death occurred within three years of the change, the IRS may draw the assets back into your estate under the 3-year contemplation of death rules. Well intentioned, wrong execution.