by Michael Cocco, CFP®, Beacon Wealth Partners/AXA Advisors

You hear about pre-nuptial agreements between soon-to-be husbands and wives. But what about people going into business together?

It’s actually a really smart idea. For closely held or family businesses, a properly designed and funded buy-sell agreement can save time, hassle and money, similar to a pre-nup for some couples.

In the end, it could actually save the business itself too. That’s because…

• Less than 1/3 of family businesses survive the transition from 1st to 2nd generation ownership.*
• Another 50% don’t survive the transition from 2nd to 3rd generation.*

Why is it so difficult to make a smooth transition? Maybe because the owners didn’t have a plan in place to continue the business after an owner’s retirement, disability, divorce or death. This is what a buy-sell agreement is for.

Benefits of a well-designed buy-sell agreement

Not only will a buy-sell agreement describe the terms under which ownership interest in the business can and will be transferred, it can also establish:

• A market value for the business, or the way in which the value will be determined in the future. This can eliminate huge hassles (and arguments) later.
• A funding source for the purchase of the ownership interest, and the payment terms for the sale of the business. Without proper funding, the buyer could have to sell assets, take out loans or even file for bankruptcy.
• Restrictions, such as who can own the business or how to transfer or sell ownership interests.

Why fund a buy-sell agreement with life insurance?

You can purchase interest in a business by borrowing from a bank, or making installment payments. However, many people choose to fund a buy-sell agreement with permanent, cash value life insurance because if offers:

• Proceeds Paid Quickly – The death benefit or cash values* are available (generally income tax free) when they are needed, to fund the business sale.
• Cost efficiency – The premiums are significantly lower than the death benefit itself, and can be much lower than the cost of a loan. What is a buy-sell agreement? A legally binding contract that establishes under what conditions, to whom and at what price an owner, partner or shareholder can or must sell his or her interest in the business.
• Stability – A life insurance death benefit is guaranteed, so you know it will be available when you need it.

*Loans taken from a permanent life insurance policy’s cash value will generally be free of current income tax as long as the policy remains in effect until the insured’s death, does not lapse or mature, and is not a modified endowment contract. This assumes the loan will eventually be satisfied from income tax-free death proceeds. Loans and withdrawals reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, matures, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values.

Michael Cocco is a CERTIFIED FINANCIAL PLANNER® professional with Beacon Wealth Partners/AXA Advisors in Nutley. He may be reached at  or (973) 667-8650.

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