Buy/Sell Succession Planning
The Buy/Sell Succession Strategy is a rather simple method that can accomplish the goals of the business founder(s) and resolve some of the issues inherent in business succession. The Strategy is designed as a cross-purchase agreement between the business owners. The Agreement is a legal document between the owners in which a specific amount is agreed upon for the heir(s) of each owner to sell a deceased owner's share of the company to the remaining owner(s).
Since life insurance can provide an immediate source of cash to fund the arrangement at death, the cross purchase would normally be funded with life insurance policies. Upon death, the business owner's stock becomes part of his/her estate and will pass through his/her estate to his/her heirs. The heirs would then sell the decedent's stock to the active owner(s) per the terms of the buy/sell agreement. The active owner(s) would use the life insurance death benefit proceeds, which are generally received income tax free*, to purchase the decedent's stock.
Once the stock is sold, the surviving heir(s) has/have cash from the sale that they may invest and use to provide income for their lifetime.
The Buy/Sell Succession Strategy can provide income for the surviving heir(s) and transfers control of the business to the surviving owner(s).
*Proceeds from a life insurance policy paid because of the death of the insured are generally excludable from the beneficiary's gross income for the federal income tax purposes. IRC Sec. 101(a)(1).