August 2024 – Fraternal Benefits Message

“Success without a successor is ultimately failure”

A buy-sell agreement is a legally binding contract between owners of a small business that addresses the death or disability of an owner. A buy-sell agreement makes stipulations the owner or partners must follow with regard to certain key questions, such as: Who can purchase an owner’s or partner’s share of the entity. What events will trigger a buy-out, typically death or disability. What price will be paid for the business ownership share. 

Cross-Purchase Agreements: A Cross-Purchase Agreement is a contingency plan typically funded with life insurance or disability income insurance to facilitate the exchange of value. Each business owner is covered individually by life or disability policies, and each owner is a beneficiary of the other owners’ policies. In the event one owner or partner dies, the remaining owners or partners receive the proceeds from the policies. These funds are then used to purchase the deceased owner’s interest in the business at a previously agreed upon price. Advantages: • Creates a legally binding transition of the business. • Establishes a fair market value. • Protects proceeds of the transfer or sale from creditors. • Provides liquidity for the deceased owner’s estate. Entity-Purchase Agreement: Like a Cross-Purchase Agreement, an Entity-Purchase Agreement facilitates the transfer of a business ownership share is the event of a death. The agreement involves having the company purchase life insurance policies on the lives of the owners in an amount equal to the ownership percentage. In the event of an owner’s death, the proceeds from the policies will be collected by the company and then used to purchase the deceased owner’s stake. The ownership interests are known and determined in advance, and additional out-of-pocket expenses are avoided by the surviving owners. The deceased owner’s estate must sell, and the new business entity must buy the deceased owner’s interest. Advantages: • Creates a market and establishes a value for the ownership share. • Establishes a smooth succession plan at a fair price. • Ensures the estate a prompt and full payment. • Makes cash values in the policies assets on the balance sheet. • Requires only one policy per owner to be purchased.

The Knights of Columbus can help small businesses with Key Person, Executive Bonus plans, and buy-sell agreements. Give me a call and let me know how I can help you best.

Ryan Janak – Field Agent

832-693-3160 Ryan.Janak@kofc.org