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Intro to Buy-Sell Agreements

Intro to Buy-Sell Agreements

Most small businesses fail to survive beyond the first generation. One reason is the failure to plan for the disposition of the business at an owner's death, disability, retirement, or withdrawal.

How a Buy-Sell Agreement Works

A buy-sell agreement is a contract that assures the continuation of the business by obligating the company or co-owners to buy, and obligating you or your estate to sell, the business interest at the occurrence of specified events such as death, disability, withdrawal, or retirement.

Drafted properly, a buy-sell agreement will help set the value of the business for federal estate tax purposes and may reduce the chance of valuation disputes with the IRS.

Advantages of Buy-Sell Agreement

Leaving a family business to children at death through will provisions does not answer the key problems. A disgruntled heir or a dissatisfied spouse may attack a will. Often, part of the business ends up in the hands of inactive heirs who can add little to the business but who want income equal to working stockholders. The result is an increased probability of business failure and inevitable family discord. Most importantly, a will cannot address the central problems created when a business owner dies or becomes permanently disabled.

The Properly Funded Buy-Sell Agreement Assures
  • An orderly transfer of the business to the one heir who will be a working stockholder.
  • Avoids conflicts between heirs with each owning 50% and only one of them working in the business.
  • The heirs receive the fair market value of the business as an inheritance.
  • The value established in the buy-sell agreement is binding on the IRS for federal estate tax purposes.
  • The continuity in management provides stability for customers, staff, creditors, and investors.

Western & Southern Life does not give tax advice. Please contact your tax advisor for information that applies to your situation.


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Last Updated: 12/14/2017