5 Situations That Call for the Use of a Buy-Sell Agreement

When it is essential or desirable to create a market for a business interest upon the death, long-term disability, retirement, divorce, or bankruptcy of an owner. When a shareholder is unwilling or unable to continue running a business with the family of a deceased co-stockholder or someone outside the business. When the continuation of a business at an owner’s death involves a high amount of financial risk and it is desirable or necessary to convert the business into cash at that time. For example, if the client’s estate is large and will not qualify for the estate tax marital deduction, a means to turn the business interest into cash at a fair price must be found so that taxes can be paid. When a highly-paid owner-employee dies, his or her salary often dies too. Proceeds from the buy-sell help replace this salary. When federal or state law make it imperative that the closeness of a close corporation be maintained. For example, too many shareholders or the wrong type of shareholder could result in an involuntary termination of S corporation status. Likewise, in most states, nonprofessionals may not be stockholders in a professional corporation. In at least one state, if no buy-back occurs within thirteen months of a shareholder’s death, the attorney general of the state could remove the corporation’s charter, a potentially disastrous result.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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