Strategy

Buy-sell funding: liquidity exactly when the agreement needs it.

A buy-sell agreement is a contract; funding it is a separate problem. Life insurance is the standard solution because the death benefit lands as tax-free cash on the schedule the agreement requires. Three main structures, each with different tax and complexity tradeoffs.

The three structures

Cross-purchase: each owner buys life insurance on every other owner. On a death, surviving owners use the proceeds to buy the deceased's interest directly. Best for businesses with 2 to 3 owners; the number of policies grows quickly with more owners.

Redemption (entity purchase): the business owns the policy and buys out the deceased's interest. Simpler to administer with multiple owners, but §101(j) compliance is required, and the surviving owners don't get a basis step-up in the redeemed equity.

Wait-and-see: the agreement allows the entity to act first; if it doesn't (typically within a defined window), the cross-purchase mechanic kicks in. Provides flexibility to handle the most tax-efficient route at the actual moment.

Sizing the coverage

Coverage should be sized to the buy-out price the agreement defines. If the price is a formula (e.g., 3x trailing EBITDA), coverage tracks the formula. If the price is a fixed annual valuation, coverage is updated annually.

Underfunded buy-sells are common and dangerous: when the death happens, the agreement triggers a buy-out but the proceeds don't cover the obligation. The survivors are forced into a partial buy-out or a financing scramble, neither of which is what the agreement intended.

Disability is the half people forget

Permanent disability of an owner triggers most buy-sell agreements just as death does, but life insurance doesn't pay on disability. Disability Buy-Out (DBO) insurance fills the gap, typically with a 12-month elimination period and a structured payout (lump sum or installments).

If your buy-sell has a disability trigger and no DBO coverage, you have a contract you can't fund. We model both pieces and quote them together.

Buy-sell funding is a coordination problem. The attorney drafts the agreement. The CPA models the valuation and the tax treatment. We structure the insurance. None of the three works without the other two.

Common questions

What buyers usually want to know.

What is a buy-sell agreement?

A contract between business owners that defines what happens to an owner's equity interest at death, disability, retirement, or other triggering event. The agreement names the buyer (other owners, the business itself, or a hybrid) and the price (often a formula, sometimes a fixed valuation reviewed annually).

What are the three main structures?

Cross-purchase: each owner buys life insurance on every other owner; on death, surviving owners use the proceeds to buy out the deceased's interest directly. Redemption (or entity purchase): the business itself owns the policy and buys out the deceased's interest. Wait-and-see: the agreement allows the entity to act first; if it doesn't, the cross-purchase mechanic kicks in. Each has different tax and complexity tradeoffs.

Why fund with life insurance specifically?

Because the buy-sell needs liquidity at exactly the moment the business has lost a productive owner. The death benefit is generally tax-free under IRC §101(a) and (j), provides the cash on the schedule the agreement requires, and doesn't deplete the business's working capital or require borrowing in a stressed moment.

How does the disability piece work?

Disability buy-out (DBO) insurance pays a lump sum or installments when an owner becomes permanently disabled, triggering the disability-buy-out provision in the agreement. Many buy-sells handle death well but neglect disability; we recommend covering both.

What's the §101(j) wrinkle on redemption-funded buy-sells?

When the business owns the policy (redemption structure), §101(j) notice-and-consent requirements apply just like a key-person policy. The insured owner must be given written notice that the business is the beneficiary and consent before issue. Missing this turns the death benefit taxable, which destroys the funding.

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