The business owners and the family members active in the business
enter into a binding buy/sell agreement for the purchase and sale of the business owner's stock.
Each active family member purchases a life insurance policy on the business
owner naming that family member as owner and beneficiary.
Business bonuses income to active family members to cover premium payments.
Upon death, the business owner's stock becomes part of his estate. The estate
sells the stock to the active family members in return for cash generated by the life insurance policies.
Upon the business owner's death, The active family members receive
life insurance death benefit proceeds with which they will purchase decedent's stock.
A family run business is one of the most common types of businesses that
exist today. The family business owner faces various issues. One such issue is whether to keep the
business in the family, and if kept in the family, which family member would want to continue the
business. Another issue is, if the business is kept in the family, will it produce enough income to
support the business founder and spouse during their retirement. Shifting a family run business from
the founding generation to successive generations can be a hard task, both financially and emotionally.
The issues that affect the family run business can also cause conflict between business prosperity and
family unity. Oftentimes the founder of the business will die before any business succession planning
has been done.
The Family Buy/Sell Succession Strategy is a rather simple method that can
accomplish the goals of the business founder and resolve some of the issues inherent in family business
succession. The Family Buy/Sell Succession Strategy is designed as a typical cross purchase buy/sell
agreement between the active family members and the business owner. Since life insurance can provide
an immediate source of cash to fund the buy/sell arrangement at death, the cross purchase would normally
be funded with life insurance policies. Since the parties involved in the buy/sell are active in the business
either as employees or shareholders, the company can be used to support the family members with the purchase
of the policies. Generally, this would be accomplished through bonus payments to the active family members.
Upon death, the business owner's stock becomes part of his estate. If the surviving
spouse is the beneficiary of the estate, through a will or trust, the unlimited marital deduction will allow
the stock to pass to the surviving spouse estate tax-free. The spouse would then sell the decedent's stock to
the active family members under the terms of the family buy/sell agreement. The active family members
would use the life insurance death benefit proceeds, which they generally would receive income tax-free,
to purchase the stock.
Once the stock is sold, the surviving spouse has cash from the sale that he/she may
invest and use to provide income for his/her lifetime. The sale of the business's stock through the family
buy/sell agreement can create financial security for the surviving spouse without current income or estate
taxation. It also removes any concerns the surviving spouse may have about the continuation of the business
after the business owner's death.
By purchasing the stock through the family buy/sell agreement from the spouse,
the heirs active in the business can now control the business without the problem of providing sufficient
dividend income for the surviving spouse. The Family Buy/Sell Succession Strategy may not accomplish every
objective of the business owner, however, it is an essential planning tool in the right direction.
The Family Buy/Sell Succession Strategy can provide the following benefits:
Income for the surviving spouse who is not active in the business.
Transfers control of the business to the active family members without gift or estate tax.
