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July 07, 2015 at 01:49 PM
One of the most difficult types of assets to deal with in an estate plan is co-owned property, whether that’s real estate or a closely held business such as a law firm, a medical practice, or other entity.
It can be difficult to dispose of half that property after the client’s death in a manner that satisfies the co-owner. And the heirs will certainly want an ownership share if they plan to be involved in the business after the client’s death. But if the client still wants to be engaged in the business for as long as possible, it’s often not feasible to sell the property till after death.
One useful solution is a buy-sell agreement. A buy-sell agreement provides for the orderly buy-out of equity interests upon the occurrence of triggering events, most commonly death but for other purposes as well. The agreement can stipulate not just who the ownership will pass to but also how to determine the purchase price, the process and timing for the eventual buy-out. It’s also a valuable tool to be used if the client’s equity in the business might trigger the estate tax.
Let’s say the client wants to leave his share of a co-owned business to his two children. Upon the client’s death, the heirs are assured of having the right to purchase their share of the property.
The children would sign a buy-sell agreement, which could provide that the children are allowed to sell or transfer their interest during the client’s lifetime — but only to each other. If there were more people named in the agreement, they could sell their interest to any of them as well.
Without that buy-sell agreement, the client’s interest in the business will likely pass to his or her estate and be distributed in accordance with the estate plan. That could take a while to pass through all the proper channels; and the full value would be included in the client’s estate for tax purposes.
A buy-sell agreement not only ensures the heir’s ability to purchase the interest upon the client’s death; it also establishes an agreed formula for determining the purchase price. The agreement can also be used to purchase insurance to fund the buyout.
