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Without proper planning, the premature death of a business owner may result in the business being liquidated, sold to outside parties, or surviving family members may have to become active in the business. To plan for the orderly disposition of the business, a buy-sell agreement should be considered.
A buy-sell agreement can be between shareholders of a corporation, partners of a partnership, or a key employee and a sole proprietor. The agreement obligates the surviving business owners, key employee, or the business itself to purchase the interest of the deceased owner. An attorney will need to prepare the buy-sell agreement.
A buy-sell agreement may be structured in one of three ways. You should seek the advice of your tax advisors to determine which is best for you.
Personal Funds of Owners — Most business people do not keep large sums of liquid assets that would be needed to purchase the deceased owner's interest. Most money would be in their businesses.
Sinking Fund — The premature death of an owner may not give the business time needed to accumulate the purchase price.
Borrowed Fund — A bank may not be willing to lend money to a business that has recently lost an owner or the cost of the interest of the loan may be excessive.
Installment Payments — The heirs of the deceased owner may not get the sum or money needed to settle death costs and there is no guarantee future payments will be received if the business fails.
Life Insurance — There are many advantages life insurance offers that the other alternatives do not:
A State Farm® agent can help you choose an insurance program that will meet your objectives.
State Farm Life Insurance Company (Not licensed in MA, NY or WI)
State Farm Life and Accident Assurance Company (Licensed in NY and WI)
IL - 37.2