MONEY MATTERS: Why a buy-sell agreement is important to have
Why is a buy -sell agreement important to have?
That's probably one of the biggest areas we deal in business insurance. Let's say you and I own a business together.
You own 50% and I own 50%t. What a buy sell agreement does is it's an agreement, a document that says if I pass away then you're going to buy my shares from my spouse.
If you don't do that, maybe we've got a great working relationship and all the sudden i'm gone now you're partners with my wife. What the buy sell agreement does is it sets a market for that.
And it can be mandatory or it can be optional and the only way the insurance comes into play. I own a policy on you, you own a policy on me. If I pass away you get the proceeds you turn around and take the proceeds and buy my shares from my wife.
That's a cross purchase buy sell agreement.
There's also a stock redemption buy sell agreement where a company will own lets say there are four or five members and the company will own policy on all the guys, the partners. If one of them would pass away the money gets dumped into the company and there's an agreement that says we're going to buy the shares from the estate of the deceased. That's a buy sell agreement. Insurance is used a lot in the business market.
And those agreements are usually written in the insurance itself? Is that a separate legal entity that does that?
That's totally a separate document. In fact it comes into a problem once in awhile i'll see an agreement that's unfunded. Someone had taken the time to write up this nice document but there's no sinking fund, no money to buy out the partner. It's a separate agreement that you do with an attorney.
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