Maryland Bar Bulletin
Publications : Bar Bulletin : August 2007

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At the time of her passing, Anna Nicole Smith had an outdated will in place. The ensuing chaos portrayed on television prompted many individuals to review their wills, a practice which is always worthwhile. A practice which is equally important, but often overlooked, is reviewing your business “will” or succession plan.

Having a buy-sell agreement in place provides a smooth transition of control and ownership to the intended successor. The agreement helps to ensure the financial security of the decedent’s family and keeps the surviving owner(s) from becoming business partners with an unwelcome or perhaps inappropriate individual or entity. In addition, a well-crafted agreement can establish a value for federal estate tax purposes which is binding on the IRS (IRS Sec. 2703).

Creating the agreement is only half the task. A well-structured buy-sell agreement loses its value if funding to buy the business is not in place. Generally speaking, there are five ways to fund a buy-sell agreement: personal funds, a business sinking fund, borrowed funds, installment payments to heirs by the buyer, and life insurance on the owner(s).

Often a combination of funding mechanisms is used with a heavy emphasis on life insurance. Using personal funds to purchase outstanding shares is not an option for most individuals. Creating a sinking fund in the business may not provide sufficient cash in time, and even if enough cash is present, the business could face an accumulated earnings tax issue. Borrowed funds may impact the credit worthiness of the business and/or shareholders, and installment payments to heirs from the buyer may ultimately be too burdensome for the remaining owner(s) or insufficient for heirs.

Buy-sell life insurance allows for speedy funding of the buy-sell agreement for pennies on the dollar. If the business owner can qualify for buy-sell life insurance coverage, immediate financing is available at death, the proceeds are generally income-tax free and the business’ credit position is strengthened. Additionally, if cash-value life insurance is used, the accumulated cash can be used for a retirement buy-out should all owners live to retirement.

Having a qualified professional draft an up-to-date, funded, buy-sell agreement is a crucial step to creating a sustainable business. As is the case with your personal will, your business will should be reviewed periodically. For a referral to a qualified attorney, please contact our office.

Jason S. Abosch,CPA, PFS, CFP®, MBA is an associate of FranklinMorris, Coordinating Broker for the Bar Associations Insurance Agency, Inc. For more information on the insurance benefits available to MSBA members, visit our website at: www.msba.org/departments/membership/baia/franklinmorris.pdf.

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Publications : Bar Bulletin: August  2007