Life insurance has long played an important role in funding buy-sell agreements, especially for transfers taking place at the founding owner's death. But what about transfers occurring while the founder is alive, at retirement? Here, too, it has an important role to play — though for different reasons.
To understand the special role life insurance can play in a family business buy-sell agreement taking effect at retirement, it's first necessary to discuss an effective means by which family businesses can be purchased by heirs — the private annuity.
A private annuity is an unsecured promise to make periodic payments to an individual for life in exchange for the transfer of a valuable property interest — almost exclusively a family business. (Remaining unsecured is a critical requirement of a private annuity, for reasons explained shortly).
A typical private annuity involves a parent (the transferor) who is ready to retire and who needs to use the business's equity to financially support the retirement. In exchange for the business, the child (the transferee) gives an unsecured promise to pay a monthly or annual sum to the parent for the parent's lifetime. If the parent is married, the payments may be paid for the joint lives of both parents. The amount of the annuity payment will depend on the business's valuation, the parents' life expectancies, and an assumed interest factor.
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