The retirement, disability or death of a business owner can create serious problems for the owner or the owner’s family. In a closely held business with a small number of owners, in all likelihood there will not be a market for the sale of the interest of an owner who retires, becomes disabled or dies. The solution is a buy-sell agreement that requires mandatory buyout of an interest in the event of the occurrence of such contingencies. A buy-sell agreement provides for the mandatory sale of an interest by an owner (or his or her estate) who retires, becomes disabled or dies. The buy-sell agreement contains a method for determining the sale price in such scenarios. The price can be a stated price adjusted annually by the owners, book value, formulas tied to earnings, fair market value based on appraisals, et cetera. The agreement also provides for a method and time of payment, for example a lump sum payment within ninety days of the triggering event or annual installments at a set interest rate over a certain number of years. The business can provide for life insurance on an owner payable to the business to be used to fund the buyout in the event of the death of the owner-insured.
Buy-sell agreements have a number of benefits from an estate planning point of view. An owner (and the owner’s family) during the owner’s lifetime has the security of a mandatory buyout upon the owner’s retirement or disability. Also an owner’s family has the peace of mind that there is a certain market for the mandatory purchase of a deceased owner’s interest at a set price. Also the sale price determines the value of the interest for federal estate tax purposes. This helps avoid disputes with the IRS over the proper valuation of a decedent’s closely held business interest. Buy-sell agreements are also valuable succession tools to be used in a family owned business. For these and other reasons, a buy-sell agreement should always be part of one’s estate plan when a closely held or family business is involved.
Attorney John R. Mugan
