Today's Practice: Changing the Business of Medicine TP2018Q2DigitalEditionWeb | Page 58

F I NA NCE
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 redemp-
tion" 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.
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