BUY & SELL

Death of a partner could spell the death of your business. Without a formal plan for transfer of ownership problems may arise. A Buy and Sell plan funded with specially designed life insurance plans can guarantee a business has the funds to buy out a deceased partner’s beneficiary and guarantee the beneficiary will have an income in exchange for his/her interest. A properly arranged Buy & Sell plan funded with life insurance will help with an orderly transfer of the business ownership avoiding the following problems:

THE PROBLEMS

The Deceased’s Heirs May:

•	Insist on a job and an active roll in management.
•	Insist on dividends being paid (something not usually done in a small business).
•	Threaten to sell, or actually sell their interest to competitors.
•	Force liquidation in order to obtain funds.

Employees May:

•	Feel insecure; their morale and productivity may sag.
•	Look for new jobs leaving costly replacement problems.

Creditors May:

•	Tighten up on credit in light of the firm’s weakened and uncertain condition.

Surviving Partner May:

•	Have no cash for the buy out.
•	Find the business in total turmoil.
•	Have to hire outsiders to take up extra workload
•	Have no idea how much it will cost to buy out the deceased’s heirs.

How It Works

A. Cross Purchase - is an agreement whereby the individuals agree to purchase each other’s interest. Each partner will be the owner, beneficiary, and premium payer of a policy on the life of the other partner.

Benefits

•	The basis of property that has been acquired is stepped-up to the current fair market value.
•	Creditors cannot reach the insurance proceeds.
•	Heirs receive a fair and agreed upon price for their share of the business.
•	Death proceeds received income tax free

B. Entity Purchase - is an agreement where the business will be the owner, beneficiary, and premium payer on the lives of the partners.

Benefits

•	One master policy can cover all persons.
•	Premiums paid by the business.
•	Preferable if tax bracket of the business is less than that of the individuals.
•	Death proceeds received income tax free.

TAX TREATMENT OF BUY & SELL PLAN

•	Premiums are not tax deductible (IRC 264(a)(1).
•	Interest paid on loans of business owned policies up to $50,000 per person are a tax-deductible business expense (1986 TRA).
•	Cash values grow tax-deferred (IRC 101(a)).
•	Death proceeds received income tax free (IRC 101(a)).
•	Under Cross Purchase, business will receive a stepped-up basis. Any appreciation would escape capital gain taxes (IRC 1014(c)).
•	Tax free access to cash through loans and withdrawals is available in Non-Modified Endowment Contracts (1988 TAMRA).

We assume no liability for any loss or damage resulting from reliance on or use of this material. Interested parties should consult their legal advisor. Tax laws change over time and should be reviewed for the most current interpretation of the law.