• LinkedIn
  • YouTube
  • Twitter
  • Facebook
  • Google+

How should we structure a buy-sell agreement?

by on
in Discrimination and Harassment,Human Resources

R.H. from Tacoma, Wash. writes:

I am one of three owners in a small business. We're concerned about the impact of a disability on one of us. What are the possible tax ramifications if we buy disability insurance on the lives of all three business owners to fund a disability buyout? How do we structure the arrangement to benefit from lower capital gains taxes?

Whether the insurance buyers are the owners of the corporation (a cross-purchase agreement) or the corporation is the owner (an entity agreement), the premiums are nondeductible and tax-free to the recipient.

If the corporation does buy out all the disabled shareholder's shares, the redemption is treated as a sale of the redeemed shares (assuming the shareholder isn't considered to indirectly own any company stock under IRS rules after the redemption). With a cross-purchase arrangement, the transaction is considered a straight stock sale.

So the disabled shareholder can benefit from the new 15 percent maximum capital gains rate (assuming the disability occurs before 2009). The taxable amount is the amount received in excess of the shareholder's basis in the company.

But the tax rules are slightly different if the business entity is a partnership, rather than a corporation. A termination resulting from an entity agreement is treated as a liquidation of the partner's interest, which may trigger some ordinary income taxed at regular rates. See your tax pro for the details.

Finally, assuming the disabled business owner realizes gain from the buyout, the gain is included in that person's taxable income in the year received.

Like what you've read? ...Republish it and share great business tips!

Attention: Readers, Publishers, Editors, Bloggers, Media, Webmasters and more...

We believe great content should be read and passed around. After all, knowledge IS power. And good business can become great with the right information at their fingertips. If you'd like to share any of the insightful articles on BusinessManagementDaily.com, you may republish or syndicate it without charge.

The only thing we ask is that you keep the article exactly as it was written and formatted. You also need to include an attribution statement and link to the article.

" This information is proudly provided by Business Management Daily.com: http://www.businessmanagementdaily.com/5807/how-should-we-structure-a-buy-sell-agreement "

Leave a Comment