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15 Cards in this Set
- Front
- Back
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Buy-Sell Agreements
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Planning method used for the disposition and continuation of small business interests that entails surviving business owners acquiring the interests of the decedent, or the business itself acquiring the interest
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Advantages of a Buy-Sell Agreement
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(1) Guarantees a market
(2) Provides liquidity (3) Pegs estate tax value of business interest (4) Provides for the continuation of a business (5) Makes the business more attractive to creditors (6) Prevents transfers to unrelated parties (7) Helps to avoid expensive appraisals |
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Terms of a Buy-Sell
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(1) Parties involved
(2) Purpose (3) Commitments (4) Business Interest Description (5) Transfer restrictions during lifetime (6) Purchase price (7) Funding (8) Transfer details (9) Modification/termination |
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Characteristics of Proprietorship Buy-Sells
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One owner: potential purchasers are key employees, group of employees
Life insurance may be used to purchase the business |
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Partnership Buy-Sells
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(1) Entity purchase
(2) Cross purchase |
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Entity Purchase Agreement
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A contract where the business entity purchases an owner's business interest upon the occurrence of specified events, such as death
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Cross Purchase Agreements
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Business owners purchase an owner's business interest upon the occurrence of stipulated events, such as death
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Insurance Arrangements for Partnership Buy-Sells
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(1) Entity Liquidation Agreements
(2) Cross-purchase Agreement These different agreements are funded by life insurance policies EL: Partnership owns the policy, is beneficiary CP: Partners own the policy, are beneficiaries |
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Entity Liquidation Agreement
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A buy-sell agreement that provides that the entity will purchase and then liquidate the interest of a decedent-partner death
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Formula for determining the number of policies needed to cover all other partners is a Cross Purchase Agreement
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N x (N-1)
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Corporate Buy-Sell Agreements
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(1) Stock Redemption (Entity Purchase)
(2) Corporate Cross-Purchase |
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Stock-Redemption Buy-Sell Agreement
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The corporation is the purchaser of the stock at the death of the shareholder; the stock is either retired or held as treasury stock, which allows for a proportional increase of ownership by surviving shareholders
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Corporate Cross-Purchase Agreements
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Each shareholder agrees to purchase a specified percentage of the decedent shareholder's stock at the time of death
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Insurance Arrangements for Corporate Buy-Sells
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For Entity Purchase (Stock Redemption):
The corporation is the applicant, owner, beneficiary of the policies; policy acquired on each party; business pays premiums, proceeds of policy go through business to decedent's estate; decedent's business interest goes to business and surviving owners' percentage increases For Cross-Purchase Agreements: Each shareholder purchases adequate life insurance on the life of other shareholders; N x (N-1) policies needed; the beneficiaries are the purchasers (business owners) of the policy; business owners pay premiums, and receive proceeds which go to decedent's estate, and the estate redeems the business interest and surviving owners ownership increases |
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Methods of Price Setting for Buy-Sell Agreements
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(1) Fixed Price
(2) Formula Determined Price (3) Appraisal Determined Price (4) Combination of Fixed, Formula, and Appraisal |
