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Advanced Markets Group | B U S I N E S S

Advanced Markets Group
BUSINESS SUCCESSION PLANNING

Continuing the Family Business
The Situation
George and his sister Barbara opened a software consulting business 20 years ago and have grown revenue by more than 1,000%. Now entering their 50s, they are considering their retirement options and the best way to continue the business within the family. George and Barbara also want to have a plan in place to ensure that the business can continue if one of them dies prematurely.

The Solution
A cross-purchase Buy-Sell agreement can help ensure that the business will continue and the families will be compensated at a fair and equitable price. Importantly, the Buy-Sell agreement provides a method to transfer the business interest at retirement, disability or death. Here is how it works: George and Barbara agree to buy and sell their business interest to each other if a triggering event, such as death occurs. Once a business valuation is complete, each of them purchases and owns a life insurance policy on the other and makes premium payments with after-tax dollars. At the death of one of them, the death proceeds are paid income tax-free to the surviving owner. Using these funds, he or she buys the business interest from the estate of the decedent. The decedent’s estate receives a step-up in basis on the business interest upon death so it pays no capital gains tax upon the sale. Upon retirement or a permanent disability, the policy’s cash value can be used to fund a buyout.

SUCCESSION PLANNING

During Lifetime George and Barbara purchase and own policy on each other At George’s death Barbara receives death benefit and, pursuant to agreement, purchases George’s business interest from his estate Business Estate sells business interest to Barbara subject to agreement George’s business interest passes to his estate

$$$

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How It Works: Cross-Purchase Buy-Sell
Depending on the structure of the business, a different type of Buy-Sell agreement may be required.

Entity Purchase (Stock Redemption) Plan: The owners enter into an agreement with the business. The business
then purchases the deceased or departing owner’s interest. If insurance is used for funding, one policy on each owner is owned by the business.

Hybrid Buy-Sell: A combination of methods may be used to create options for a deceased owner and remaining
owners. In a hybrid “wait and see” agreement, an owner owns a policy on each other owner. When the other owner dies, the business may be given a 30-day option to purchase the deceased owner’s interest. If the business does not exercise the option, the surviving owner may exercise it using the death proceeds from the insurance. If the surviving owner does not exercise it, then the business can be required to buy it. Similar options can be used for permanent disability and/or retirement.

How It Works: Entity Purchase George, Barbara and 3 others own equal shares in the business George Dies

George’s estate receives cash from life insurance proceeds in exchange for stock Shares $$$

Barbara and 3 others own equal shares in the business

George’s business interest is redeemed by the business

How It Works: Hybrid Buy-Sell George, Barbara and Sam own equal shares in the business Barbara Dies Barbara’s shares are in her estate $$$ Shares After 30 days, surviving owners purchase shares

Shares

$$$

Business has 30 days to purchase
This information is for general education of producers and contains references to concepts that have significant legal, accounting and tax implications. It is not intended as legal, accounting or tax advice. Clients should consult with their own tax advisor regarding the application of these concepts to any particular situation. Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal government entity. Universal life insurance is issued by Sun Life Assurance Company of Canada (Wellesley Hills, MA) or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada (Wellesley Hills, MA), or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All are members of the Sun Life Financial group of companies. ©2008 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada.
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