Buy-Sell Agreements
Ted Waldron
Cross-purchase plans have several advantages . For example , the surviving shareholder gets a " step up " in the income tax basis for the stock bought from the deceased ' s estate . This could reduce income taxes if the surviving shareholder later sells the stock . Additionally , with cross-purchase agreements , the insurance proceeds are not subject to the corporate alternative minimum tax ( AMT ), nor to the claims of corporate creditors . But these plans can be hard to administer if there are many owners . Since the shareholders individually own policies on the lives of their fellow shareholders , absent other planning , fifty-six separate policies would be needed if , for instance , there were eight total shareholders .
Stock Redemption Agreement .
In this case , Consulting Inc . buys and owns insurance policies on the lives of Alex and Brad . When Brad dies , the corporation buys his stock with the insurance proceeds . Stock redemption plans may make sense when there are multiple owners of the corporation , there are large differences in age and ownership levels among the owners , or the corporation is in a lower tax bracket than the owners . Two potential drawbacks to these plans : the death proceeds received by the corporation may be subject to the corporate AMT , and the surviving shareholders do not get the benefit of an increase in the income tax basis of their shares when the corporation redeems the stock .
Keeping Proper Balance .
Often , in an effort to make things fair , business owners structure a life-insurance funded buy-sell agreement so that each owner is treated alike . But that may seemingly result in a windfall if the owner holding a minority share of the company outlives the majority owner . agreement , each was required to buy the other ' s stock under identical terms . And each bought life insurance on the other ' s life to fund this buyout . When Brad dies , Alex collects the $ 700,000 of insurance proceeds and pays that sum to Brad ' s family for the controlling interest in the company . Alex is also likely to buy back his own insurance coverage of $ 300,000 for full value . Result ? The minority partner , Alex , now has a 100 percent interest in a $ 1 million company and a $ 300,000 policy . Brad ' s family loses control of the firm , but receives $ 700,000 in cash and the proceeds from the sale of the insurance on Alex ’ s life .
Buy-sell agreements can help protect your business and your family . Seek the guidance of a professional financial adviser who can identify the various issues and considerations that will help determine what type of buy-sell agreement makes the most sense for you .
meet the author :
Ted Waldron
North Shore Advisory Group
Ted Waldron , RFC has served as President of the North Shore Advisory Group , Inc . since 2002 . Mr . Waldron entered the securities industry in 1992 as a registered representative for American Express in Boston . He is also affiliated with Athlete Advisory Services and is registered with the NFL Players Association . Previously , he had been giving the economic and stock update reports on New England Talk Radio , a Boston Herald radio affiliate . Educational seminars have included workshops for the Mass Society of CPA ’ s , the Mass Firefighters Union , the retiree chapter of AFSCME , Verizon retiree chapter 222 , and other various public forums . Ted Waldron holds various licenses including series 7 , 63 , 65 , life accident and health .
Suppose the $ 1 million Consulting Inc . was owned 70 percent by Brad , and 30 percent by Alex . Under their
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