Business owners in Maryland can benefit from estate planning strategies, both on a personal and business level. This may include the use of a buy-sell agreement, which can be an important tool for an owner of an interest in a closely-held or small family business. The business may be organized as a partnership, an LLC or a small business corporation. The buy-sell agreement may provide for business succession procedures, for restrictions on the transfer of stock or business shares, and for the purchase of the share of a withdrawing owner or partner. Specifically, it may apply when a shareholder, member or partner retires, dies, becomes incapacitated, permanently disabled, or for other unexpected departures. This article focuses largely on the buy-sell agreement in the estate planning context to facilitate the individual’s goals for the direction of the business and for compensation of his or her beneficiaries after death.
The Important Benefits of the Buy-Sell Agreement:
The buy-sell agreement offers several important benefits, which may include:
- Preventing withdrawing partners, members or shareholders from selling their share to an outsider without first offering it to the corporation or the remaining owners or partners;
- Providing funding and establishing the terms and conditions for purchase or sale of a disabled, deceased, incapacitated, retiring or withdrawing owner’s share in the business;
- Providing a formula that can be advantageous tax-wise to the parties in arriving at the fair value and price of the share being transferred;
- Giving enforceable contractual assurances to each owner or stakeholder that nothing will precipitously impact one’s share in the business, except by strict adherence to the clearly established terms in the agreement.
|The Buy-Sell Agreement and Estate Planning:
For estate planning purposes, the buy-sell agreement helps to minimize stress and uncertainty to the beneficiaries. This may occur where there is no plan and/or insufficient funding for passing the decedent’s business interest to the beneficiaries. For example, one of the co-founders of a family-owned company may desire that the business is kept within the family and not sold to outside parties when she dies. She also wants the other owners to purchase her share so that her beneficiaries can inherit the full value of her share.
The buy-sell agreement usually gives the surviving business owners a “right of first refusal” to purchase the decedent’s share. This keeps the business in the closely-held family circle and tends to assure that the values and traditions that made the business a success will endure.
Life Insurance Facilitates Purchase of the Decedent’s Share:
Free-flowing cash or liquid assets are not always available to purchase a valuable interest in a successful, longstanding business. Indeed, the agreement will provide that the decedent’s share is offered on the market if the corporation or the surviving shareholders or partners cannot complete the transaction. But pre-planning through the buy-sell agreement removes that uncertainty and establishes an automatic mechanism for funding the purchase of the decedent’s ownership interest.
That is accomplished through life insurance, which may be purchased as a group of policies that covers each of the owners or partners for the various contingencies, including death. The purchase price of the decedent’s share is calculated by the formula contained in the agreement, which was tailored to provide maximum tax savings to the parties. The insurance coverage is pre-calculated to pay the value of the decedent’s share and expenses related to the transfer. Periodic review of the formula and the insurance funding is necessary to avoid insufficient financing.
Using a Will or Living Trust To Distribute the Business Proceeds and Other Assets:
The business owner’s last will and testament is usually the centerpiece of the estate plan. It provides for the disposition of the owner’s share with reference to the buy-sell agreement. Alternatively, circumstances and personal preferences may occasionally call for using a living trust instrument as the central mechanism for asset distribution. In that event, the agreement will be coordinated with the trust for a seamless transfer of the proceeds to the beneficiaries. With the trust, probate may be avoided, and any minimal assets found in the probate estate may be disposed of by a “pour over” will that gifts the stray assets to the trust for final disposition.
The trust may also establish management of assets by the trustee if the owner becomes disabled or incapacitated. A separate power of attorney is also recommended to cover all bases in the event of incapacity. In addition, the avoiding of probate usually facilitates a quicker distribution of the business purchase proceeds and the other assets; administrative expenses may also be significantly reduced. Nonetheless, the estate planning decision to use a living trust or a will is a relatively complex issue in Maryland and elsewhere. It requires professional guidance and analysis. Estate planning, trust administration, and business interest transfers through a buy-sell agreement are not safely accomplished through internet templates. Trying to self-maneuver such an intricate legal and financial web may cause mistakes and extraordinary expenses. The process may be best accomplished with the combined input of the estate planning attorney, a qualified financial planner and a life insurance agent.
For guidance in crafting your buy-sell agreement or any other estate planning documents, contact Maryland attorney Elsa W. Smith at the Law Offices of Elsa W. Smith, LLC. We have two offices to serve you – Annapolis (410) 556-0077 and Laurel (301) 358-4340. You can also contact us through this website.