Advanced Marketing Forum Question

Any Problems with an Informal Buy Sell Agreement

Question:
I'm working with 2 business owners who want to buy life insurance and name each other as the beneficiary for the purpose of funding a buy sell arrangement. They do not want to go through the process of writing up an agreement and working with a lawyer. Will the purchase of the insurance suffice legally to be binding on each party? Would the deceased business owner's family have any right to the dollars that the surviving business owner received? What issues make them aware of?

Reply #1:
Consider this:

Owner A owns a policy on Owner B. Owner A is the beneficiary of that policy and agrees informally to pay owner B's estate a certain sum of money if owner B dies. Owner B dies. Owner A gets the death proceeds and decides not to pay as informally agreed. Then what? He is not bound to pay by anything.

That is a very bad idea because Owner B's family will then own stock in the company and have no money. And they will have to sue but will have no "contract" agreement to sue on. Even if Owner A does pay his partner's family some money, there will be no agreement that says how much he has to pay.

If they insist on not having any agreement, then I would be sure that Owner B has a policy on himself (in trust perhaps outside of his estate) to provide for the standard of living he wants for his family should he die, because he may not be able to rely on money that should be there from the sale of the business to the surviving shareholder.

Jane Warner, Esq. Director Advanced Planning Sun Life Financial Phone: (800) 432-1102 x1756

Reply #2:
True story:

Two brothers start a business--a grocery store. They agree to "take care of each other's family" if something were to happen to either one of them. There was no formal contract. One brother dies and the survivor pays the widow for her share of the business at what he felt was a fair price.

The surviving brother builds the business to be one of the most successful chain of supermarkets in Massachusetts. The widow and her children wonder if they were dealt with fairly. Didn't "taking care of the family" mean sharing in the growth earned from deceased's sweat equity?

The courts were embroiled in this case for over a decade. It became the fodder of ugly speculations, accusations and scandal. Law firms were censured by the courts for underhanded dealings with opposing counsel. All of this was great reading over morning coffee.

What was the outcome? The judge kicked out the surviving brother and gave the reins of the business to the widow's son.

Moral: Pay the couple of hundred dollars for the formal agreement that establishes how the business will be valued.

Tere D'Amato, CLU, ChFC
Director Advanced Planning
Ext: 9168
E-mail: tdamato@commonwealth.com

Reply #3:
The policies themselves would not be binding. They need an enforceable buy-sell agreement. You should also make sure you haven't created a transfer-for-value problem by having these policies cross-owned. In other words, if shareholder A also owns the policy insuring himself and names shareholder B the beneficiary, that's a transfer-for-value and will make the death benefit income taxable (unless an applicable exception applies).

Eric Burke Mills, JD, LLM
Director - Advanced Designs
Pacific Life Insurance Company
Phone: (800) 800.7681 x3713
Fax: (949) 219.5049
E-mail: emills@pacificlife.com

* The foregoing is for broker/agent use only, and is intended solely for informational purposes. Nothing contained herein should be construed as legal or tax advice, and should not be relied upon for such. Legal and tax advice should only be obtained from your attorney or qualified tax professional.

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