This article discusses an arrangement where the business owner can still "sell" his or her business if there is no buyer or if the owners cannot agree on the business value.

 

A buy-sell agreement can establish the value of the business interest, provide for continuation of the business in the hands of the remaining owners, and provide protection for the survivors of deceased owners or retired or disabled owners.  Many business owners want their families to have cash at death rather than business interests with limited marketability and look to a buy-sell arrangement to give this liquidity.

 

While a buy-sell agreement can do many things for a business owner, it may not always be necessary or practical.  In some situations, there may not be a willing buyer or the owners may not agree on a business value.  For these scenarios, it might work well for the owner to do a "buy-sell without the sell." 

 

Instead of buying insurance on the partners or stockholders, each owner decides for him or herself what the business interest is worth and arranges for life insurance on his or her own life in that amount.  The owner and beneficiary of the life insurance is an irrevocable life insurance trust for the family.

 

At the business owner's death, the trust uses the insurance proceeds to buy the business interest from the deceased's estate.  The family gets the cash from the insurance and the trust gets the business interest.  The trust could then hold the business interest until the right time to sell -- when the business goes public, the top of the business cycle, or when the business matures and the stock peaks in value.  Under this scenario the business owner avoids transferring at death all future growth potential to the new owner.  With proper planning, the life insurance proceeds can be income and estate tax free.  The life insurance proceeds can be used to pay the estate tax on the business interest, leaving it intact.

 

The trustee should be someone the owner is confident can run the business.  In some cases a co-trustee from the family or key employees may be appropriate.

 

When there are willing, agreeable buyers, a typical buy-sell arrangement may be most advantageous.  In addition, if the business is a personal service corporation or an S corporation, it may not be prudent to transfer ownership to an irrevocable trust.  However, if no buyer is available, it may work well to use this trust arrangement to create the liquidity to pay estate taxes, create survivor income and move potential future growth to benefit the decedent's family.