The purpose of a buy-sell agreement is to ensure that you retain control over who owns your business.
The most common situation where a buy-sell agreement operates is where one owner of a business dies. Without a buy-sell agreement, the deceased owner’s interest in the business would pass to their estate. If this happened to you, you could end up in business with the beneficiaries of the deceased owner’s will (usually their immediate family).
Buy Sell Funding Agreement
A Buy Sell Funding Agreement is a contract between business partners where the surviving partners buy out the other partner’s interest should a specific event occur. Specific events usually include death, and long-term disability. A Buy Sell Funding Agreement can consist of several clauses in a partnership or shareholder agreement. It can also take the form of a separate, freestanding agreement.
This suite contains free-standing agreements that can be used together with a partnership, company or unit trust.
An insured Buy Sell Funding Agreement is one in which a triggered buyout is funded with life insurance. A policy is taken out on each of the participating owner’s lives. The life insurance policy provides the surviving partners with the money to be able to buy out the deceased/disabled/departing partner’s interest. Such an arrangement is often recommended by financial planners to ensure the buy-sell there will be money when the buy-sell event is triggered. The funding aspect is covered in a separate agreement called a Buy Sell Funding Agreement.
Capital Gains Tax implications
A trauma or total and permanent disability insurance policy is subject to CGT if it is owned by the business. Only a trauma or total and permanent disability insurance policy owned by the insured is exempt. The business owner often holds the policy on themselves. As the buy/sell agreement results in the sale of the business, a CGT liability will arise to the vendor. The small business CGT concessions may operate to reduce this CGT liability.
Deductibility of Premiums
The essential characteristic of a deductible insurance premium is that it be intended to provide an income. A self-employed business owner can claim a deduction for premiums on a policy which will pay income during a period they are disabled. Normally, if a policy includes a component to pay a sum on death or disability, the component relating to death cover will not be deductible
- 1 Definitions 3
- 2 Insurance
- 2.1 Life Insurance
- 2.2 Additional cover
- 3 Payment of Policy Proceeds
- 3.1 Payment on exercise of option
- 4 Payment Amount
- 4.1 Reduction of purchase price
- 5 General Provisions
- 5.1 Insurance premiums
- 5.2 Termination
- 5.3 Costs
- 5.4 Notices
- 5.5 Counterparts
- 6 Interpretation
- 6.1 Jurisdiction
- 6.2 In the interpretation of this agreement: