FINANCE
Buy-Sell Agreements
Ted Waldron
Using Life Insurance :
Drafting a buy-sell agreement is only the first step . It will have limited practical benefit unless the purchaser can afford to buy the deceased owner ' s shares . Life insurance is often used as the preferred source of cash . When a business owner dies , the policy proceeds are used to buy the shares from the deceased owner ' s estate at a price set forth in the agreement .
There are two basic types of buy-sell arrangements : the " cross-purchase " agreement and the " stock redemption " agreement . Life insurance can be used to fund both .
Cross-purchase agreement .
In Alex and Brad ' s situation , each of them buys -- and is the owner and beneficiary of -- a life insurance policy on the other . Upon Brad ' s death , Alex receives the policy ' s death benefit , which he uses to purchase Brad ' s shares from Brad ' s estate . In turn , that cash payment gives Brad ' s family needed income to offset the loss of Brad ' s earnings .
55 TODAY ’ S PRACTICE : CHANGING THE BUSINESS OF MEDICINE