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), consider a lifetime agreement among the business owners as to how to dispose of the business.
Entity plan
Under an entity plan, the corporation or partnership buys the interest of the deceased business owner. This arrangement is often used when there are several owners.
Cross-purchase plan
With a cross-purchase plan, each surviving owner agrees to buy the interest of any deceased business owner.
Consult your attorney to decide which plan is better for your circumstances.
Advantages of buy-sell agreements
The advantages of buy-sell agreements include:
- A guarantee of a buyer for an asset that will probably not pay dividends to one's heirs.
- The ability to establish a value for federal estate tax purposes that is binding on the IRS (see IRC Sec. 2703).*
- A chance to spell out the terms of payment, and easily fund those terms with life insurance and disability insurance, if desirable.
- Providing a smooth transition of complete control and ownership to those who will keep the business going.
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