Small business owners should consider what will happen to the business in the event of the death of a shareholder. Typically, corporations will use a Key Man Insurance policy to fund either a Buy-Sell Agreement or Cross-Purchase Agreement among the shareholders. The following are benefits and concerns for each type of plan.

Entity Purchase Buy-Sell Plans Benefits to the Firm

• The firm is to be the owner, premium payor, and beneficiary of policies on the lives of its owners.


• The business is to use the proceeds of the policy to purchase a deceased owner s interest from his or her estate.


• Fair market value of the interest is to be established and liquidity for the owners estate created.


• The business is in a lower tax bracket than owners, effectively lowering the cost of the plan.


• Pooling of premium shares is desired when there is an age disparity among the owners.


• Survivors want a guarantee that funds will be available to purchase shares at the death of an owner.


• Stability is sought. Employees, lenders, customers, suppliers, and shareholders are more confident of business continuation after the death of an owner.


• No unreasonable compensation concerns as in the case when salaries are increased to pay life insurance premiums under a cross-purchase agreement.


• An unwanted forced sale is to be avoided.


• A smooth transition of control is desired.

Concerns for the Company

• Premium payments are nondeductible by the membership.


• The value of the business interest, as specified in the buy-sell agreement, is includible in the Member’s estate.


• Voting power could be unfavorably shifted at a member’s death.


• Insurance cash values and death benefits are subject to claims of company creditors.


• It can result in higher capital gains to surviving owners should interest be sold at a later date because no step up in basis is available.


• The firm s loss of the use of the premium payment.

• There is to be an exchange of business interest for cash/notes among members or third-party buyers.


• Members seek to establish a fair market value for their business interest.


• Members are to be owners, premiums payors, and beneficiaries of life insurance policies.


• Surviving members wish to receive a step-up in basis in acquired interest, possibly resulting in tax savings at a later sale.


• Avoidance of family attribution concerns is desired.


• Life insurance cash values and death benefits are not to be subjected to the claims of company creditors.


• Premiums are to be paid by the firm, through a bonus arrangement, and treated as reasonable compensation to owners.


• An agreement is needed to continue the business after the death of a Member, free of conflicting interests.


• Surviving members want a guarantee that funds will be available at the death of an owner.


• Stability is sought. Employees, lenders, customers, suppliers, and shareholders are more confident of business continuation after the death of members.


• An unwanted forced sale is to be avoided.


• Life insurance proceeds are to be free from income taxation.


• A smooth transition of control is desired.

Concerns for the Company

• The value of business interest as stated in the buy-sell agreement is includible in a members’ estate.


• The member’s loss of use of premium payment.


• Possible unreasonable compensation concerns where salaries are increased to pay life insurance premiums.


• The member may have difficulty in paying premium.