Prior to 2010, Bob Mason was living the good life. In partnership with his Dentist, they owned a local horse-boarding ranch on 114 golden California acres. They were approaching two decades of working together when the unthinkable occurred – the Dentist unexpectedly passed away.
Over the course of the next two years Bob tried his best to keep the business going, but ultimately, the weight of a lengthy and protracted court battle to settle the estate was too much to bear. Saddled with a faltering business, mounting legal fees, and various negotiated settlements, Bob was left with no option but to declare bankruptcy. He not only lost the business he and his partner had built together, but also the horses, the facilities, and the ranch he had dreamed of since a little boy growing up on a farm.
Today Bob is nearing 80 years of age, instead of nestling into retirement after a lifetime of work, he is experiencing serious financial challenges and had to return to the daily grind of driving trucks to supplement his income.
What makes this tale such a tragedy is that with a little forethought the bankruptcy could have been avoided. A Buy-Sell Agreement funded with Life Insurance could have saved Bob his ranch.
What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a written contract among the owners of a company in which each owner agrees that upon the occurrence of a specified event, such as a death or the separation from the business, their shares will be sold to the surviving owner at a specified price and that each owner commits to buy the shares of their departing co-owner.
There are three types of Buy-Sell Agreements. The first, the Cross Purchase Agreement, allows the remaining co-owner to purchase the interest of the departing owner. The second, the Entity or Redemption Agreement, requires the business itself to purchase the interest of the departing owner. The final type, the Hybrid Agreement, is a cross between the previous two, requiring the remaining owners and business to purchase the interest of the departing owner. The remaining owner has the option to buy the departing owners interest. If he chooses not to, the business would be obligated to do so.
A Buy-Sell Agreement is often funded with Life Insurance on each partners life. That way when a death occurs the benefits immediately kick in. The company or partner receives the death benefits from the policy and money is paid to the surviving heirs of the deceased as payment for their interest in the company.
Bob Mason wonders why his tax preparer and financial advisors never mentioned a Buy-Sell Agreement funded with life insurance. He wishes they had.
Today Bob wants other business owners to learn from his experience.
Its incredible, he said, I could have easily avoided this nightmare by paying a couple of hundred dollars a month on a life insurance policy for my partner.
I ended up betting the ranch on someone else’s health,” he said, “No one should ever have to do that.”
If you have any questions regarding Buy-Sell Agreements funded with Life Insurance please call local experts, Palma Financial Services Inc. in Dublin, CA. We can be reached by email, cpa@mpalma.com or phone, at 925-307-5454.