Jul 06

Buy and Sell Agreements

Buy and Sell Agreements

If you are in partnership with one or more people you need to have an agreement that protects your heirs if you die. A Buy and Sell agreement should be the document that upholds what is rightfully owed to your heirs, when you are not there to fight for them.

I always tell my clients not to devalue their shareholding in the buy and sell agreement because it can be a costly mistake. What owners of businesses should not forget is that on death the shares that they own goes to their estate, the shares therefore attracts estate duty at the true value of the shares.

Some owners have incorrectly set up the agreement so that the value of each of owner’s shares is equal to the life cover that is in place to fund the buyout of the shares from the respective estates. With the share attracting estate duty there is going to be a double impact and result in a greater loss and these technicalities are often forgotten so you normally have a situation of perception not meeting reality.

If the affordability of the life cover is an issue for each of the partners rather have alternative clauses like the difference will be paid to the heirs over twelve to twenty four months. If the payment is a burden to buy the reaming shares then invite the heir (normally the spouse) to join the business as a shareholder.

Another way to save on cost is to have the business valued each year so that the shareholders can adjust the funding to save on premium for the next year or make sure that if someone were to pass that the correct scenario would pan out.

If you would like more information about Buy and Sell Agreements and how to fund them correctly, please feel free to contact me.

If you would like more information on any of the following please contact me:

How to split the premium correctly for different percentage share holding.
How to use loan accounts for premium, if company’s bank account is used.
Permission from a spouse married in community of property to enter into a buy and sell agreement.

A Buy and Sell Agreement is a costly document to draft and that is what as an added client service I provide a free standard agreement when I provide the life cover to fund the buy and sell agreement.

It is rather complicated and not everyone is aware how to structure the life covers without the covers attracting taxes.