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It is essential for business partners to have a plan in place for the future of their business in the event that one partner dies. This is especially important in a case where the business will likely have little value to one’s heirs. The Buy-Sell Life Insurance Plan provides a smooth transition of ownership in order to keep the business running. Creating a Buy-Sell agreement before a tragedy strikes provides peace of mind for both partners.
A Buy-Sell agreement takes into consideration the expectations of a business if one of the business partners should die. With the Entity Plan, it is the corporation that buys the interest of the deceased business owner. This type of plan often gets used when there are more than two owners. A Cross-Purchase Plan is similar but is generally used in a partnership (two owners). Under this plan, each surviving owner agrees to buy the interest of the deceased owner. A Buy-Sell plan can be funded in one of four ways: cash, installment, loan, or insurance method. Funding with cash requires having the necessary funds available, which often may not be the case. The installment plan can, likewise, drain the surviving family’s income, and is dependent on future business performance. The loan method assumes that the new owner(s) can obtain a business loan, which may not be a viable option. Furthermore, borrowing the purchase price requires that future business income be used to repay the loan, plus interest. Therefore, the best way to fund a Buy-Sell plan is with life insurance.
After the business has been accurately valued, using life insurance to fund a Buy-Sell Plan after an owner’s death can guarantee that the funds are available to complete the sale. This, in turn, ensures that the business can keep going.
Approval #L0112234984[exp1112][OH]
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