Buy-sell agreement funding
Using life insurance to make sure a buy-sell agreement actually has the money to work.
About a 5-minute read
What it is
A buy-sell agreement is a legal contract that decides what happens to an owner's share of the business if they die, become disabled, retire or leave, including who can buy it and at what price.
Life insurance is a common way to fund the purchase when an owner dies, so the remaining owners have cash instead of debt, and the family receives fair value instead of an unwanted business interest.
Who it's often for
Businesses with two or more owners, and owners who want their family paid fairly without being forced into the business.
How it works
Scene 1
The flow at a glance
Cross-purchase
Entity purchase
- 1Cross-purchase: each owner owns a policy on each of the other owners. When one dies, the surviving owners receive the benefit and buy the deceased owner's share from the family. With many owners this means many policies (3 owners need 6 policies), though a trust or LLC can simplify it.
- 2Entity purchase (redemption): the business owns one policy on each owner. When one dies, the business receives the benefit and buys back that owner's share.
What to watch out for
- An unfunded or outdated agreement can fail when it's needed most.
- The agreed price or valuation formula should be updated regularly.
- Plan for disability and retirement, not just death.
- Cross-purchase and entity structures have different tax results for the surviving owners.
- In 2024, the Supreme Court's decision in Connelly v. United States held that life insurance a company receives to fund a redemption can increase the company's value for estate tax purposes, which has led many owners to revisit entity-purchase arrangements.
Questions to ask before moving forward
- Do we have a signed agreement, and is it funded?
- When was the business last valued?
- Which structure fits the number of owners and our goals?
- What happens if an owner becomes disabled?
Who else should be involved
Your attorney (drafting the agreement), CPA (structure and tax), and possibly a business valuation professional.
Related concepts and services
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Book a ConversationAdvanced concepts are described in general, simplified terms for education only. They involve legal, tax and financial considerations that depend on your situation and on current law, which can change. IAM Money Management does not provide tax or legal advice; consult your attorney and tax professional before implementing any strategy. Life insurance and annuity products are issued by insurance carriers, and features, costs and guarantees vary by carrier, product and state. Guarantees are backed by the claims-paying ability of the issuing carrier.