Buy-Sell Agreements May benefit Your Heirs

When your business is a significant part of your estate, a Buy-Sell Agreement between you and your business co-owners may be especially important for your heirs.

A Buy-Sell Agreement is a contract among the owners of a small business that sets the ground rules as to what happens when certain events occur, such as your death or the death of one of your co-owners.   

A Buy-Sell Agreement may benefit your heirs in the following ways:

Provide a buyer for your share of the business. Typically, a Buy-Sell Agreement provides that your business interests will be purchased by your other co-owners or your company upon your death. Without such a pre-arranged mechanism for purchasing your interests, it may be difficult to find someone to buy your share – particularly if you do not own a controlling interest in the business. 

Provide a pre-arranged price or pricing formula. Without a price formula negotiated as part of a Buy-Sell Agreement, your heirs may have little-to-no bargaining power with the other co-owners or outsiders in obtaining a favorable price for your share of the business. Without bargaining power, your share of the business may be steeply discounted in price, harming your heirs. 

Provide cash to your estate to pay estate taxes and expenses related to your death.  Your estate tax return is due to the IRS no later than 9 months after the date of your death. Your personal representative also needs cash to deal with the debts of your estate, including funeral expenses and creditor claims.

Facilitate the timely settling of your estate. When a Buy-Sell Agreement sets up the roadmap for who will buy your interests, at what price, and with what source of funds, the settlement of your estate need not be delayed by indecision and drawn-out negotiations over what is to happen to your business interests. Only when your estate is settled can your heirs move on with their lives and reap all the financial benefits from your estate.

Life Insurance May Provide the Money

Of course, finding the money needed under the Buy-Sell Agreement to buy out the business interests of the deceased owner is key to making the Buy-Sell Agreement work. Life insurance is one way of providing the money.

 Buy-Sell Agreements Also Benefit the Surviving Co-Owners

Buy-Sell Agreements provide benefits for the surviving co-owners of your business also.

A key premise behind closely held businesses is that the co-owners should be able to decide who their business partners are. Without a Buy-Sell Agreement, the deceased’s heirs could have a voice in the management of the business – a recipe for possible personality and management clashes. Such clashes can harm the company’s performance and lead to a weakening of its value.

Thus, all of the co-owners benefit from a Buy-Sell Agreement.

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305         952-649-9771     bonnie@bwittenburglaw.com   www.bwittenburglaw.com