My Account
If you are not familiar with the phrase "Sudden Death Buy-Sell", let’s first understand what it means and how it is used to keep a business going when one of the business partners dies or becomes legally incapacitated.
This is not legal advice, so be sure to consult with a qualified attorney about your circumstances. It is a general discussion that is helpful when thinking about the ownership of a small business. Contact us at T.D. McNeil Insurance Services in Folsom, CA, with any questions.
How It Works
In a common scenario, there are two (or more) business partners who form a company or take over an existing operation. They both have an ownership interest in the business.
If one of the business partners dies or becomes legally incapacitated, the other business partner needs to be able to buy out the ownership interest of the one who can no longer work for the business.
When a sudden death buy-sell agreement is in place, the procedures for how this process occurs are agreed upon prior to the need. Additionally, life insurance may be maintained on the business partners, and the proceeds of each policy can be earmarked to pay the heirs, and allowing the operation of the business by the surviving partner.to continue.
Key Person Life Insurance
A financial strategy that helps support a sudden death buy-sell agreement is to agree on how the business will be valued, and maintain life insurance on the partners in sufficient amounts to cover the valuation.
Imagine the business is worth $1 million dollars, and has two business partners with equal shares of ownership. There are life insurance policies on each partner for half the value, or $500,000 each. If one dies, the life insurance pays off the value, and this becomes part of the estate of the deceased. The surviving partner continues to operate the business.
To get your questions answered, reach out to us at T.D. McNeil Insurance Services in Folsom, CA, for all your life insurance needs.
