10.3.2 Buy-Sell Plans
A buy-sell plan offers several advantages to business partners. The partners know they have a legal right to buy a deceased partner's share of the business, and the family and heirs of the partners know that the partnership interest will be disposed of at a fair price. Further, the money needed to purchase the deceased partner's interest will be available when needed. All this adds up to security and peace of mind for all involved, including employees of the business.
There are several different types of buy-sell plans available for business owners. Which is best suited depends on their particular business structure and goals.
Disability Buy-Sell Agreements
The disability buy-sell agreement functions in much the same way as the life insurance buy-sell. These plans provide for the sale and buyout of the business' key person's stock or owner's share of the business in case of disability. Since it is considered a valued disability policy, the plan usually allows for a lump sum payment for the purchase; however, periodic income payments are also a possibility which would actually reduce the cost. Disability buy-out plans typically contain extended elimination periods which allow time for the recovery of principal.
Disability buy-outs are normally entity purchases, not cross-purchases.
"Economically dead" is a term used to demonstrate the impact a disabled owner or partner has on a business. The disability buy-out serves as the buy-sell agreement for a partner's economic death.
Economically dead means physically disabled but not physically deceased.
Sole Proprietorship Buy-Sell Agreements
A sole proprietor (one owner) can arrange for the business' sale to a successor or to another predetermined buyer (for instance, an employee or family member) from the deceased's estate. The buy-sell agreement then is binding for the buyer to purchase the business and the estate is obligated to sell. A life insurance policy can be used to fund the agreement.
