Disability Buy-Sell Agreement

							                          Disability Buy-Sell Agreement




                                                                                                         PLANNING
At some point in the life cycle of a small business, it is possible that the owner (or one of the own-
ers) will become disabled. Should this happen, one of two things will take place:
• The business will be continued by the family or other owners
• The business will be sold or liquidated
The purpose of a Disability Buy-Sell agreement is to spell out the process by which one of the
above will occur.
A Disability Buy-Sell Agreement is a legally binding arrangement that guarantees the sale and pur-
chase of a business interest in the event of a business owner’s total disability. The agreement can
be set up as an "entity" plan, where the business buys the interest of the disabled owner, or a
"cross-purchase" plan, where the other individual owners buy the interest of the disabled owner.




                                                                                                          FOR
When funded with Disability Insurance, a Disability Buy-Sell Agreement solves a
number of problems
• An instant market for the business interest is created.
• The price and terms of payment are specified in advance.




                                                                                                          A
• Money is provided to fund the purchase of the business interest.
• The business is allowed to continue without interruption.




                                                                                                         SECURE FINANCIAL FUTURE
• A source of income for the disabled owner is created without burdening the business or the
  remaining owners.
There are advantages and disadvantages to setting up a Disability Buy-Sell Agreement under
either the entity purchase method or the cross purchase method.
Entity Purchase Agreement
The business (partnership or corporation) purchases disability insurance on each individual
owner, and uses the proceeds to purchase the interests of the disabled owner.


    Advantages                                     Disadvantages
    Fewer policies                                 Possible corporate Alternative
                                                   Minimum Tax
    The business pays the                          Insurance proceeds
    disability insurance premiums                  subject to business creditors
    Unreasonable compensation                      Remaining owners’ cost basis not
    not an issue                                   increased




PM0414
Cross-Purchase Agreement




                                                                                                  PLANNING
The individual owners purchase disability insurance on each other, and use the proceeds to pur-
chase the business interests of the disabled owner.

    Advantages                                  Disadvantages
    Increased cost basis to                     Increased administration
    remaining owners
    Policy proceeds protected                   Difference in amount of premiums
    from business creditors                     paid by owners
    No Alternative Minimum Tax                  Multiple policies




                                                                                                   FOR
                                                                                                   A
                                                                                                  SECURE FINANCIAL FUTURE