I am excited to have a guest post this week by Brent Eden, JD and Jimmy Trimble, CFP®.
A buy-sell agreement is a foundational document for any firm or business with multiple owners/partners. If you do not have one, stop reading this and go take care of that first! It will benefit your firm to work with an attorney experienced in the nuances and tax implications of the two basic buy-sell structures (cross-purchase and entity redemption).
Once you have the buy-sell agreement in place, the next big question is how to fund it. Funding the buy-sell helps ensure that the intended benefits of the agreement will actually be received in the case of an untimely death. Buy-sell agreements can also address disability and other disruptive issues, but the focus here is funding in anticipation of a partner passing away.
Funding can take the form of cash, investments, or life insurance. The significant majority of partnerships use life insurance since fully-funding the agreement with cash or investments is frequently unrealistic and since life insurance is often well suited for this purpose as described below.
Below are three reasons to fully-fund your buy-sell agreement sooner rather than later:
Unfunded buy-sell agreements can create unintended consequences
In the unfortunate case of a rainmaking partner passing away without a fully-funded buy-sell agreement, the remaining partners may find themselves in a firm with financial difficulties. The loss of income to the firm can have serious consequences and put the viability of the firm at risk. Moreover, if there are buy-out requirements, the financial situation becomes worse. Life insurance proceeds can be used to fund a partner buyout, provide funds to the firm, or some combination of both.
Future health can be uncertain
Typically, the existing partners are as healthy today as they will ever be. As we age, medical issues arise more frequently which makes obtaining insurance coverage more challenging. By securing coverage today, the partnership will address the risk that one or more of the partners will become less insurable in the future.
Fully funding your buy-sell agreement may be easier than you think
Life insurance is often an ideal option for funding a buy-sell agreement because the event that creates the need (the death of a partner) also creates the funds to satisfy the obligation. When designing a policy, the three primary variables are cost, length of coverage, and amount of coverage. Each of these variables can be adjusted based on the current and expected needs of the firm in order to provide a customized solution.
Successful firms and businesses should plan for a variety of unexpected events including the death of a partner. As outlined above, doing so has multiple benefits and it may be easier than you think. If your buy-sell agreement is unfunded, consider contacting an insurance professional today to discuss your options.
This information is provided for educational purposes only and is not intended as advice. You should discuss your personal situation with a financial professional prior to making any decisions.
Brent Eden, JD and Jimmy Trimble, CFP® are Advisors with the firm of Nease, Lagana, Eden & Culley, Inc., one of the country’s leading specialty life insurance firms. Brent can be reached at firstname.lastname@example.org or (770) 956-1800 and Jimmy can be reached at email@example.com or (404) 487-8712.