The Rep's Broader Role

With a cross-purchase plan, upon a triggering event of one owner, the other owners will purchase the departing owner’s business interest. To provide funds for the purchase, each owner generally buys a life insurance policy on the other owners. If permanent policies are used, an owner may access the cash value of the policy he or she owns to help with the purchase.

With an entity-purchase plan, upon a triggering event, the business purchases the departing owner’s business interest. The business generally buys life insurance policies or disability buy-out policies on each owner. The entity purchase arrangement consolidates and centralizes buy-sell duties in the business.

There are other forms of agreements, among them:

? Unilateral buy-outs, where a sole-proprietor and key person enter into an agreement;

? Wait-and-see buy-sells, which creates three tiers of possible buyers: the business, the surviving owners, and again the business (which buys any interest not purchased by the remaining owners); and

? Escrowed buy-sells, which is a cross-purchase plan that only requires one policy on each business owner.

Factors to consider

There are a variety of advantages and disadvantages associated with each type of buy-sell agreement. The insurance rep must weigh these pros and cons when helping the client make the appropriate choice.

Some factors to consider include:

? Shifting control — In a cross-purchase plan, unintentional shifts of ownership control usually are not an issue. These shifts can be an issue with an entity-purchase plan, but they are easily dealt with.

? Basis — In a cross-purchase plan, a purchasing owner’s basis in the business is increased by the purchase price. In an entity plan, the basis of the surviving owners may or may not be increased when the death benefit is paid, depending on the type of entity (e.g., C Corporation, S Corporation, Partnership or LLC).

? Tax implications — In a cross-purchase plan, the proceeds from the life insurance are not included in the deceased shareholder’s estate. The deceased is not the owner of the policy and, therefore, the insurance proceeds payable at death are not included as part of the estate. On the other hand, in an entity plan, the estate tax consequences can become more pronounced when the deceased shareholder has a controlling interest.

Funding

There are several ways to fund a buy-sell agreement. Sources include existing or borrowed funds, after-tax savings dollars, cash flow, an immediate annuity and, of course, insurance (or a combination of these methods).

Here again, the field representative is best positioned to make the case for why insurance is the best alternative for funding a buy-sell agreement: life insurance for the purchase obligation arising on death; and disability insurance for the purchase obligation arising upon disability.

There are some easy-to-see advantages to funding with life insurance. It will help assure that funding is available to purchase the business interest at the business owner’s death. It can provide funds to purchase the business interest for the cost of premiums paid on the policy. It will help avoid any negative impact on working capital and credit position of the business. And it’s a simple and effective funding method compared with other vehicles.

Most Americans are better prepared financially to die than to become disabled, though the chances are at least 3 to 5 times greater of a disability occurring. This is a significant fact to a business owner, or so it should be. In all likelihood it will be up to the representative to raise the issue with the client.

For one thing, there are several sources of tension in the business environment when the disabled owner is no longer able to contribute to the continuing success of the business. Clearly, it’s best to plan for disability in advance, and it’s up to the representative to show how a buy-sell agreement should include a provision for buy-out in the event of an owner’s permanent disability.

The rep’s broader role pays off

Clearly, there are benefits when a field representative takes on the broader role in the buy-sell agreement process. With wide-ranging knowledge that goes beyond product, he or she will be able to get the attention of both the attorney and the accountant, helping them to deliver the best plan to the client. The representative also will be aligning himself or herself with some valuable centers of influence and possibly more business opportunities down the road.