A buy-sell plan can provide numerous advantages to the estate of a deceased business owner, to a retiring or disabled owner, to the remaining or surviving owner(s), and to their families. Some of the important advantages are:
1. Provides continuity of management by requiring the estate or disabled owner to sell the decedent's or disabled owner's interest in the company to the remaining owner(s) of the business. There will be no unexpected or unwanted owners. The business will be operated and managed by the remaining owner(s).
2. Provides the estate of a deceased owner with the needed liquidity by converting an illiquid asset to cash. The cash can be used to settle a decedent's estate and establish an income stream to the beneficiaries. In a disability situation, the cash provides a needed source of income to the disabled owner and his or her family. Generally, it is unlikely that an estate or disabled owner could sell an interest in a closely held business on the open market for a fair price. The buy-sell agreement creates a certain market for the business interest at a fair price.
3. Provides a retiring owner a method to convert his business wealth to personal financial wealth, and to fund retirement and legacy goals.
4. Provides a fair and reasonable price for the business. The purchase price, or the mechanism to determine the purchase price, is established by the parties to the agreement during life when conditions and provisions for the buy-sell agreement can be negotiated fairly and reasonably.
5. A corporation may accumulate funds for a reasonable business purpose without regard to the accumulated earnings tax. IRC S537(a). Case law suggests that the use of life insurance to fund a stock purchase agreement is a legitimate business purpose.
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