Sale and Purchase Agreement: What happens if a closed business owner dies or is disabled?
Business partners and close business shareholders need to focus on the potential of one of the partners for premature death or permanent disability. If the deceased's property provides for the transfer of the business to the shareholders' family, they may not wish to be a partner, have no interest in the business, or are likely to interfere with the business without managing the business experience, Partners create major difficulties. In extreme cases, the thriving business fails or is forced to sell in this case. The sale and purchase agreement can solve this problem by providing the enterprise with the necessary cash to buy the surviving family benefits.
There are usually two types of sale and purchase agreements, which I discuss in this article. The first is a cross-purchase agreement, where each partner or shareholder buys life insurance from other partners or shareholders. For a small partnership, there are only two shareholders or partners, the cross-purchase agreement can work well, because only two policies are necessary. However, in the case of two or more partners, cross-buying and selling agreements may become difficult to manage: for example, if there are three partners or shareholders, you need six policies (three people each for each purchase two policies Partners); if there are five partners, you need 20 policies (five partners each purchase four policies for each of the other partners). As you can see, these numbers are increasing rapidly. In order to further complicate the issue of buying and selling disability insurance (DI) policy, the purchase of disability partners in the business share, so if DI policy is added to the portfolio, the number doubles. In addition, life and DI policies are rated according to age and health, so each partner pays a lot of premiums. Tax effects can also play a role: if the partner's tax rate is higher than the company, the cost of capital will be higher than the cost of the cross-purchase agreement.
Alternative variant of the cross-purchase agreement is a stock repurchase agreement in which the company has an insurance policy for each partner The If the partner dies or is disabled and can no longer contribute to the business, the insurance policy allows the company to purchase the business interests of the partner. Because the company has a policy, it is only necessary to purchase policies for each partner, making management simpler than the cross-purchase agreement. In addition, the underwriting differences affecting premiums are borne by the firm, rather than with each partner's insurance costs. The biggest problem with the stock redemption agreement is that the remaining shareholders did not increase the benchmark valuation, but retained the original base cost of the stock. So if the stock is sold before the death, the partner will assume greater capital gains and stock redemption structures. However, if the stock exchange is complete, each owner now has a greater percentage of ownership. There may also be a hybrid approach in which a combination of cross-purchase and stock exchange is used to build the protocol.
There are many other tax issues that are beyond the scope of this article. It can be said that the tax consequences of these insurance agreements must take into account the tax impact and the partners are willing to bear the complexity. It is necessary for partners to work with their insurance agents, accountants and lawyers as a team to find the best solution, taking into account the tradeoffs that must be made.
What happens if a partner is not insurable? If the partner already has a life insurance and DI policy, the ownership of the policy can be transferred to a partner (cross-purchase) or business (stock repurchase). If the life insurance policy is a cash value product, the partner must compensate the policy for the cash investment value of the policy. Again, the tax impact is also important here: the partner must hire an accountant and a lawyer to properly organize the arrangement.
The type of insurance used for the sale and purchase agreement may be a term or cash value. As with personal policy, both have advantages and disadvantages. The advantages of the Renewable Energy (ART) policy are low early costs, but with the growth of partners, age. The level term policy will have a predictable cost structure that will expire at the end of a predetermined period (for example, ten or twenty years), depending on the content of the purchase. Once the expiration, the policy holder must again pass the underwriting to get the new policy, but because they are older, it would be quite expensive to have a good risk that one or more partners may not be able to get any Insurance, due to age and / or health. In the latter case, the risk can be reduced by purchasing a guaranteed insurance driver, but this increases the cost of the policy. Cash value policy, usually the whole life (WL) and universal life (UL) have the advantage of establishing cash value
, As a premium. These policies can be self-financed after a period of time, since the dividends generated are sufficient to cover the premium. Alternatively, the policy may continue to be financed for the purpose of financing or supplementing the pension benefits or the cash value of the shareholders' acquisition. In addition, since cash value is considered as a current asset, the funds can be used to ensure that the company is favorable to the terms of the loan.
Partners may decide to waive any sale and purchase agreement if the partner determines that the cost of the insurance exceeds the higher capital appreciation of the firm's interest. As a result, the partner can determine that the risk of premature death or disability of the partner is low enough to reinvest the funds into the firm to achieve a higher rate of return than the insurance policy, which is better for the landlord bet.
The complexity of the sale and purchase agreement allows experienced insurance agents, accountants and lawyers to organize agreements with the best possible way to meet the needs of partners, businesses and surviving family members. Because it is necessary to make a decision as to whether the purchase of the sale agreement is appropriate, and if so, from the point of view of how the cost and taxation is organized, is the difficult decision of the partner, and the right counselor will make this process easier , And are less stressful to all participants.