As Financial and Family Estate and Business Planners we have many clients who have their own businesses. A buy-sell agreement is a valuable tool for privately-owned businesses (family or non family). A buy-sell agreement creates a means for the orderly transfer of ownership between the stockholders and their families.
You may view your role and opportunity as financial advisors and consultants as initially raising the level of awareness so that the client will complete a buy-sell agreement. The initial planning often affords an opportunity to provide life and disability insurance as the most cost effective method of funding the agreement.
Realizing the need for establishing a buy-sell agreement is a key step in securing the continuation of a business. Do not overlook subsequent or new prospect opportunities. Quite often you will be told that the buy-sell agreement and funding has already been completed. My personal experience is that 60% of the existing agreements that you will see are not current or improperly funded. A Buy-Sell Check-Up is as important and necessary, if not more, than the initial execution of the agreement.
Our job is to create a long-term relationship and provide periodic services to maintain and update the business affairs of our clients. Ask the Client:
- When was the original buy-sell agreement executed?
- Does the buy-sell agreement contain a yearly renewable set price for death or disability or is the price tied to a formula that accounts for annual growth?
- Was life and/or disability insurance used to fund the agreement?
- Does the agreement meet the conditions of Section 2703 of the IRC?
The Next Step. Establishing a buy-sell agreement is not a "one step" process. Its effectiveness lies in the ability to keep !t current with the changing times. Since ownership in a business is often a major component of an owner's personal wealth, a professionally prepared and updated business valuation is critical to ensure that the estate planning process is not only complete and comprehensive but that it complies with the new and existing federal law and regulations regarding transfers within a family. Ask the client if a copy of the agreement is available for review.