If your estate includes a business or and interest in a business, you should have a buy/sell agreement. Buy/sell agreements, which require or allow the company or the remaining shareholders to purchase the interest of an owner who dies or leaves the business, provide several important benefits, including:
- Keeping the business in the family
- Creating Liquidity to help a deceased owner's family pay estate taxes and other expenses
- Providing owners with an "exit strategy"
- Establishing the purchase price for the ownership interest, which helps avoid disputes and may provide evidence of its value for gift and estate tax purposes
There are two Primary types of buy/sell agreements: the "cross-purchase" agreement, under which one or more of the other owners purchase the departing shareholder's interest, and the "redemption" agreement, under which the company purchases the interest. Buy/sell agreements should be funded by life insurance for maximum security.
Cross-purchase agreements are more complex from an administrative standpoint but offer tax advantages. The remaining owners receive a stepped-up basis in the departing shareholder's interest, thereby reducing their tax liabilities should they sell their shares. A cross-purchase agreement also avoids potential alternative minimum tax (AMT) problems associated with the receipt of life insurance proceeds by a corporation.
As noted above, buy/sell agreements can sometimes be used to establish the value of and interest in a business for gift and estate tax purposes. When a family business is involved, the agreement must be planned and drafted carefully to demonstrate that it serves legitimate business purposes and is not merely a device for reducing estate or gift taxes.
Estate Planning: A Team Effort
The key to successful estate planning is to develop a collaborative effort among all of your professional advisors. Each advisor -- lawyer, accountant, insurance professional, financial planner -- plays an important role in the estate planning process.
The role of the insurance professional is critical. Development and administration of the estate plan is often left to the other team members, but the insurance professional supplies the fuel that allows the plan to function properly. Without insurance, even the most skillfully created estate plan would likely fail.
In addition to providing insurance to fund key estate planning tools, such as irrevocable life insurance trusts, insurance professionals can also furnish disability and business overhead insurance to protect against the loss of income. They may also be called upon for increased coverage under home owner's and auto policies, as well as umbrella policies to guard against catastrophic events. Insurance professionals can also provide referrals to other advisors.
Like all your advisors, its important to choose an insurance professional who's familiar with the trust-centered estate planning process and is willing to participate as a key member of your estate planning team.
For assistance in finding an insurance professional you can trust to take an active role in your estate planning process, please contact us. We'd be happy to refer a colleague for your consideration.