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by Karen Murphy, MostChoice.com Using Trusts for Business Continuation There are several potential problems arising from a buy/sell agreement funded by life insurance. Money from insurance policies could be mismanaged or misapplied in the following ways:
A trusteed buy-sell agreement can help a business owner avoid these potential problems. A trusteed buy-sell agreement is a form of a cross-purchase agreement. Cross-purchase agreements are arrangements where the shareholders agree to purchase, in proportion to their share of the corporation, the shares of any other shareholder upon an event such as death. In most cases, the shareholders purchase insurance on each other's lives in order to fund the buy-out of a deceased shareholder's shares. In the case of a trusteed buy-sell method, the trust purchases and owns one policy on each shareholder's life. In most cases, the trust pays the insurance premiums with money from the shareholders and uses the life insurance proceeds to purchase the deceased shareholder's shares. It then distributes the money according to the terms of the trust. The insurance proceeds are income tax free. Since you don't own the insurance, the proceeds aren't included in your estate.Another benefit of a trust arrangement, is that it takes much of the control and responsibility of administering the buy-sell transactions away from the shareholders. Thus, it can reduce the possibility that a shareholder will allow a life insurance policy to lapse, or that a surviving shareholder will keep the life insurance proceeds to use for another purpose. |
