What is a Buy Sell or Buy Out Agreement?

A Buy Sell or Buy Out Agreement

A buy/sell 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 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 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.