Section 79 Planning Opportunities

Buy-Sell Agreements try to address many of the following problems:

• Death Buyout;
• Disability Funding;
• Withdrawal from Employment (for competitive or noncompetitive purposes);
• Retirement Planning;
• Tax Issues ' income, transfer, estate and gift;
• Protection from Creditors (corporate and individual);
• Fixing the Value of the Business Interest of the Owner; and
• Settle Shareholder Differences.

These goals are disparate, and many of the tools currently available do not address all goals successfully. Generally speaking, a buy-sell agreement contains a restriction on the right to transfer a business interest during the life and at the death of the business owners, as well as an option, or other right, to acquire property at a specified price. The agreement typically sets the value of a closely held business for transfer tax purposes in the form of a fixed amount or a formula. Such a value may reflect the fair market value of the property at the time of the agreement (rather than a later date such as the date of the owner's death). The buy-sell agreement is often funded by life insurance policies.

The two basic types of buy-sell agreements are a redemption agreement and a cross-purchase agreement. A redemption agreement is a contract between the business owners and the business entity (e.g., a corporation, a joint venture, an L.L.C. or a partnership) to redeem the owners' interests during their lives and/or upon their deaths. (Such an agreement may be subject to limitations imposed by state law. For example, there may be a restriction on the ability of a corporation to purchase its own stock due to capital surplus requirements or insolvency.) When a redemption agreement is funded with life insurance, the business owns the policies and pays the premiums. The premiums are not deductible by the business for income tax purposes, and the life insurance proceeds received upon the death of a shareholder are not included in the income of the business. (In the case of a corporation, the proceeds may, however, expose the corporation to an alternative minimum tax.)