Executive Summary

After carefully considering what terms should be included in your buy-sell agreement, it is equally important to craft a funding strategy that is aligned to the plan so those terms can be carried out.

Key Points

  • Finding an optimal funding level - Acquiring a life insurance policy with too much death benefit may result in unnecessary premium expenses. Acquiring a life insurance policy with too little death benefit may lead to cash flow issues, shareholder conflicts, and possible time-consuming litigation.
  • Aligning the buy-sell terms with the insurance policy - The type of insurance policy as well as the ownership and beneficiary designations should be aligned with the obligations and rights provided for in the agreement.
  • Lifetime benefits versus death benefits - Buy-sell agreements often create obligations and rights that are triggered by events other than the death of a shareholder. Cash value policies may be considered as a means for funding these obligations.
  • Tax considerations - The Internal Revenue Code contains a number of tax provisions specific to life insurance policies that have the potential to create unexpected negative tax issues. Tax issues can be addressed with proper planning.

Conclusion

Running a successful business requires you to have one eye focused on the day’s tasks and the other focused on tomorrow’s opportunities and challenges. Buy-sell agreements are a tool business owners may use to help provide for the continued success of a business should unexpected events occur. Proper funding of the obligations helps confirm your plans are carried out.


FOR AN IN-DEPTH LOOK

Implementing a Successful Buy-Sell Funding Strategy