When multiple individuals enter a business arrangement, one important planning element is to ensure a smooth transition of ownership in the event of the death, the disablement or a traumatic health episode of an owner. This is the role of buy/sell agreements in business succession planning.
A buy-sell agreement is made up of two parts, a transfer agreement and a funding agreement. The transfer agreement relates to the transfer of the departing owner’s interest in the business to the surviving owners should a trigger event (commonly death, disability or a traumatic health event) happen. The funding agreement relates to how the departing owner or their estate will be compensated for surrendering their interest in the business. Insurance policies are a common way to fund a buy-sell agreement.
There are various considerations that need to be considered such as tax on the transfer of ownership of the share in the business and the options for the ownership of the insurance policies.