Buy/Sell Planning Part 2

Business Buy Sell – Part 2

Buy/Sell Planning Part 2

Money Matters Radio – Estate Planning Q&A with Gary Goldberg

By: Martin M. Shenkman, CPA, MBA, JD


Last week, we began a discussion about business buy/sell agreements and succession planning. Well, planning for your business or professional practice is an important part of your estate planning. For many, their business is their largest asset and only source of income. What should you do?


What if someone is the business? They might be a consultant, or run a successful business out of their home, do they need a buy sell?


They still need a succession plan. If they die suddenly, what happens to the business? Will their family receive anything from the years of work they did? What about their obligations to their clients or customers? Consider:

  • Key employees might sign a buy/sell. If the principal is disabled, or dies, perhaps they can buy the business by paying out over a number of years, say 20% of gross revenue.
  • A colleague might be an option. Find a similar business that might be willing to buy you out in an emergency. If you don’t plan for the transition now, they might just pick up your customers with no payments.
  • Brokers may be an option. If you cannot work, but have had preliminary arrangements made with a business broker, they might be able to step in and sell the business before its value plummets.
  • Insurance funding to provide liquidity for the transition might still be important.

Let’s look at the basic insurance buyout in the event of death. How does that typically work for a closely held business? What’s the difference between a redemption and cross purchase?


A cross purchase works like this: Partner A buys an insurance policy on Partner B and vice versa. Whoever dies first, the surviving partner will receive the life insurance proceeds and be obligated by the buy/sell contract to buy the deceased partner’s shares. This is advantageous because the buying partner gets tax basis for the payment made so that if he or she later sells the capital gains cost will be much lower. A redemption is when the entity buys back the stock.

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