Mark W. Jordan Trusts and Estates Law Blog on Lawyers.com

This is the eleventh of a series of articles providing helpful information on estate and business planning.  Please contact the estate planning professionals at The Drew Law Firm for more details on any of these topics or for any of your estate planning needs.

              
60;                & #160;                 ;      Buy-Sell Agreements

Q:  Why are buy-sell agreements useful in estate planning?

A:  Stock ownership or a partnership interest is often a significant portion of an individual’s estate.  If this applies to you, a buy-sell plan provides you with the liquidity to cover estate taxes, probate fees, administrative expenses, and other miscellaneous cash needs at death.  In addition, this arrangement may enable you to take more advantage of any federal or state estate tax exemptions, and grant you a great deal of flexibility in the distribution of your estate.

     Without proper planning, the sudden death or disability of the owner and key person in the business, may send the company into an unrecoverable tailspin.  You or your estate would end up receiving pennies on the dollar for your largest asset.  The buy-sell arrangement is the tool to make sure there is someone who will continue your  business and give you top dollar for it.

Q:  What is a buy-sell agreement?

A:  This legally binding document, also referred to as a business continuation agreement, enables you to continue your company after the death, retirement, disability, or withdrawal of a stockholder (partner).  The two primary types are the cross-purchase agreement through which you directly buy the stock of your former co-shareholder, and the stock redemption agreement in which your company buys the interest of the former owner.  Future articles in this series will provide more specific information on the cross-purchase and sock redemption arrangements.  Two less common forms are the third-party buy-out agreement involving the purchase by a key person, outside individual, or other non-owner, and the wait and see buy-sell agreement which is a combination of one or more of the other three types.

Q:  How are buy-sell agreements different in for a family business?

A:  The Internal Revenue Code requires that a buy-out plan between you and a family member comply with each of the following restrictions:
     1.    It is a bona-fide business arrangement.
     2.    It is not a device to transfer such property to members of your family for less than full and adequate consideration.
     3.    The terms are comparable to similar arrangements entered into by parties in an arm’s length transaction.

Q:  Why is an appraisal important?

A:  Prior to the transfer of any significant amount of stock it is necessary to obtain an independent expert appraisal for tax purposes.  Just like when you gift stock in your company to your children and you need an appraisal for proper completion of a gift tax return, you need an appraisal for a transfer under a buy-sell agreement in order to set the proper arms-length value of the shares.

     The early stages of estate and business planning are critical. If you would like to arrange an initial consultation, please contact our Cincinnati office. Our lawyers will work with you to define your goals, identify significant aspects of your unique situation, and explain your alternatives.

Our estate planning attorneys: Mark W. Jordan, Robert M. Smyth, George J. Zamary, James H. Coogan, Frederic L. Goeddel, Anthony G. Covatta, Michael D. McNeil, Nancy J. Frazier and Sybil B. Mullin.