As mentioned, businessowners and professionals use buy-sell agreements to assure the orderly transfer of their ownership interests at death, to protect their assets, and to establish the value of ownership interests for estate tax purposes. If permanent life insurance is used to fund the agreement, policy cash values become a "sinking fund," which can be used for a lifetime buyout at retirement.

However, far fewer businessowners have buy-sell agreements funded with disability insurance. This can be a mistake, considering the probability of businessowners suffering a disability during their working years. (See "Consider the Odds" on the following page.)

There's a very good chance that a principal in a small or closely held corporation will suffer a long-term disability sometime before retirement. What's more, the disability can result in serious consequences:

• The disabled person will be unable to participate in the business, but his or her income needs will continue, and he or she is entitled to a share of the profits.
• The disabled person may not be productive but will still have a legal voice in the business — and the remaining principals may or may not want to listen!
• The remaining principals may need to find a replacement. To attract the right person, they may be forced to bring someone into the business as an owner. This may be impossible if the disabled person retains his or her ownership interest.

By guaranteeing a market for the owners' business interests, a disability buy-sell agreement can solve these problems for the business, while reducing the financial strain on the disabled person.

A disability buy-sell agreement provides for the purchase of the disabled owner's share of the business, either by the business entity or one of the owners, at an established price or formula for determining the price. The agreement is a formal, legally binding document which obligates one party to sell and another party to buy at the agreed-upon price, or to use an agreed-upon formula to set the price. And, the plan must be formally adopted by the owners or majority shareholders.

Disability buy-sell agreements may be cross-purchase or entity-purchase/stock redemption plans. Both may be used by both unincorporated and incorporated businesses. Though buy-sell agreements may only be drawn by an attorney — and the value of the owners' business interests is often determined with the help of a CPA or accountant — the funding is what makes these arrangements work.

Back to Top | Next

Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.

46