BUY SELL FUNDING AGREEMENT

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At a Glance

An agreement directing life insurance proceeds to fund the Buy Sell Agreement. Contains provisions for:

Requirement to take out life insurance
Payment of policy proceeds
Payment amount
Payment of premiums
Termination

Life insurance proceeds are used to purchase the share of an existing business owner.

A Buy-Sell Funding Agreement is a legal contract typically used in business partnerships or closely-held corporations to outline the process for the sale or transfer of ownership interests if a triggering event occurs. These triggering events can include the death, disability, retirement, or departure of an owner or partner.

buy-sell funding agreement is used to ensure that there are adequate funds available to facilitate the purchase of an owner’s share in the business under specific triggering events, such as death, disability, or voluntary exit. It is typically structured with life insurance policies or other financial mechanisms to provide the necessary liquidity when the business or other owners need to buy out an owner’s share.

Why You Need a Buy-Sell Funding Agreement:

Ensure Liquidity for Buyouts: When an owner dies, becomes disabled, or wants to exit, the business or remaining owners may not have the cash available to buy out the owner’s share. A buy-sell funding agreement provides the funds needed to complete the transaction without financial strain on the business or owners.
Prevent Financial Strain: Without proper funding, buying out an owner could be financially burdensome. A buy-sell funding agreement, often backed by life insurance, ensures that there are sufficient funds to buy out the departing owner’s interest without disrupting the business’s cash flow or operations.
Avoid Burdening Remaining Owners: Without funding, the remaining owners may face the challenge of finding a way to pay for the buyout. A well-structured funding agreement helps avoid forcing the remaining owners to take on personal debt or make major financial sacrifices.
Business Continuity: A funded buy-sell agreement ensures that the business can continue to operate smoothly after an owner’s departure, as the remaining owners are not forced into difficult negotiations or financial arrangements that could cause disruptions.
Tax Efficiency: Life insurance used in a buy-sell funding agreement can also provide tax advantages, making the process of funding the buyout more cost-effective and ensuring that the business doesn’t face unexpected tax liabilities.

In short, a buy-sell funding agreement ensures that there are financial resources available to buy out an owner’s stake when necessary, protecting both the business and the remaining owners from financial and operational challenges.