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In order to guarantee a buyer for the interest in a business (particularly a minority
interest which may be of very little value to one's heirs), consideration should be given
to a lifetime agreement among the business owners as to how to dispose of the business.
Entity Plan/Stock
Redemption
(Business
buys
back
the
stock
or
deceased
partner's
interest)
Under a
stock
redemption plan the corporation (or partnership) buys the interest of the deceased
shareholder (or partner). This type of arrangement is often used when there are
several owners.
The
heirs
have
a
"stepped
up"
basis
in
the
stock
and
avoid
income
taxation
on
the
gain.
Term
or
Permanent
Life
insurance
supplies
the
money
for
this
buy
back
at
the
exact
time
it
is
needed,
income
tax
free,
for
pennies
on
the
dollar.
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Cross-Purchase Plan
(surviving
partner
buys
the
deceased
individual's
interest
directly)
Under this arrangement each surviving shareholder or partner agrees to buy the interest
of any deceased business owner.
The
surviving
partner/stockholder
gets
a
stepped
up
basis
on
the
purchased
stock/interest
and
can
resell
that
stock
at a
later
date
with
little
or
no
income
tax
consequences.
Term
or
Permanent
Life
insurance
supplies
the
money
for
this
buy
back
at
the
exact
time
it
is
needed,
income
tax
free,
for
pennies
on
the
dollar.
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Your
Attorney
and
CPA should be consulted in deciding which plan is
most
suitable
for
your
needs.
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Advantages of Buy-Sell
Agreements
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Guarantees a buyer for an asset which probably will not pay dividends to one's heirs.
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Can establish a value for federal estate tax purposes which is binding.
IRC Section 2703
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Spells out the terms of payment and is easily funded with life insurance and disability
insurance.
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Provides a smooth transition of ownership to those who are going to
keep the business going.
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