For a Buy-Sell Agreement to be effective, the funding certainty of any exit transactions arising between the parties, will give confidence to all involved. Buy-sell agreement cover is ‘simply’ the financial arrangements put in place to cover the surviving partner(s) need to pay out under the terms of the agreement.
Succession planning
In our article discussing Buy-Sell Agreements we disclose how important it is to have a clear understanding well in advance of ‘events’, as to what is expected to happen when those events occur. Making these arrangements is a succession planning strategy that provides comfort to the parties to the transaction – and to the families, financially dependant on them.
Whilst the business involved will have a given value, it is also the case that any continuing ‘partners’ will want minimum disruption to business continuity – and to achieve that will want to settle any buy out with the departing partner and/ or their family/ estate as quickly as possible and in satisfaction of their commitments under the partnership or shareholders agreement (documented or implied).
Succession plan funding (aka buy-sell agreement funding)
Insurance polices, such as term life insurance, TPD insurance and trauma insurance policies are available to cover most of the risks associated with the circumstances covered in a Buy-Sell Agreement. The calculation of the amount of cover to be taken in each policy will be guided by the terms and conditions of the respective succession planning agreements mentioned above; and will be clarified (perhaps even quantified) in those documents.
Significant questions to be resolved, beyond the type and amount of cover in the context of each situation, include –
- who will own those polices; and
- who will pay the premiums.
These are important issues with significant income tax consequences; and not simple to resolve – particularly if the agreement is in respect of a business with multiple partners with relatively frequent changes in partners (such as larger professional services entities: legal and medical practices etc).
Needing assistance with buy-sell agreements and/ or funding…
Continuum Financial Planners can assist you with the resolution of these concerns and ensure that you have the appropriate cover under appropriate ownership to meet obligations that arise under the agreement. To make an appointment to discuss your situation with one of our experienced advisers, call our office (on 07-34213456), or complete the Contact Us form on our website.
