Exit Planning
Buy-Sell Agreement Comparison
A key component of an exit strategy is a buy-sell agreement. The agreement creates a
market for the business when a co-owner dies, becomes disabled or leaves the business.
A buy-sell agreement, properly structured and adequately funded with life and disability
insurance from the Principal Financial Group®, can help provide a solid landing platform for
your exit plan — and the people who depend on the future of your business.
Protection benefits of buy-sell agreements
• Family – You and your family can be protected by obligating co-owners to buy your
interest in the business for a set price and providing them the funding to do so if you die,
become disabled or leave the business.
• Co-owner – Co-owners gain protection by providing them the opportunity and funding to
purchase the business interest of a deceased, disabled or departing owner.
• Continuation – Minimize discord among owners by setting the price and terms of a sale when
an owner leaves the business.
• Business – Protect the business by preventing unwanted transfers to parties that might be unqualified or contentious, by limiting transfers of an interest in the business except under limited
circumstances.
WE’LL GIVE YOU AN EDGE®
• Estate – Fix the value of your business interest for estate tax purposes if the price meets IRS
guidelines at the time the agreement was signed.
Principal National Life Insurance Company and Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees
and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them
makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to
provide general information about the subject matter covered and is provided with the understanding that The Principal is not rendering legal,
accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should
consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.
Insurance products from the Principal Financial Group® (The Principal®) are issued by Principal National Life Insurance Co (except in NY) and
Principal Life Insurance Co, Des Moines, IA 50392. Securities offered through Princor Financial Services Corp, 800-247-1737, member SIPC and/or
independent broker/dealers. Principal National, Principal Life and Princor® are members of the Principal Financial Group®, Des Moines, IA 50392.
Secure the future
For more than a century, The Principal® has helped businesses and individuals achieve their
personal and business objectives. You can count on our steadfast commitment to provide
quality, reasonably-priced financial products and services that help both businesses and
individuals plan a more secure future.
FOR MORE INFORMATION
Please contact your local financial professional
Not FDIC or NCUA insured
May lose value • Not a deposit • No bank or credit union guarantee
Not insured by any Federal government agency
BB9090-08 | 12/2014 | t14090302zj
Buy-Sell options
The basic buy-sell agreement types are Cross Purchase, Entity Purchase and Wait and See. It is helpful to understand the basic features of each type.
Insurance Arrangement
Plan
Cross
Purchase
Entity
Purchase
Wait
and See
Income Tax Aspects
Estate Tax Aspect
Description
Premium Payor
Owner
Beneficiary
Business
Purchasing Owner
Seller Upon Death
Seller Upon Disability
Co-owners purchase
departing owner’s business
interest
Each owner pays
premium on policies he or she owns
Each owner owns
policy on life of
each other owner
Each owner is
beneficiary of policies
he or she owns
Not a party to the
agreement
• Premiums not deductible
• Proceeds received tax-free
• Basis increased by amount paid to deceased’s family
Purchase price received
generally doesn’t cause
taxable event3
Seller recognizes capital
gain to the extent
proceeds exceed basis
Value of business interest and cash
value of policies on other owners
included in gross estate
Business purchases departing
owner’s business interest
Business
Business1
Business
• Premiums not
deductible
• Proceeds received taxfree2
•C
corporations – no basis increase to surviving owners
• S corporations and other pass-through entities – with
planning, surviving owners may be able to obtain
some basis increase
Purchase price received
generally doesn’t cause
taxable event3
Seller recognizes capital
gain to the extent
proceeds exceed basis
Value of a business interest included
in gross estate
Purchase of departing owner’s
business interest by either
remaining owner(s) or business
Remaining
owner(s) or
business
Remaining owner(s)
or business (most
often owners)
Remaining owner(s)
or business (most
often owners)
Depends on the previously
mentioned owner and
beneficiary arrangements
Depends on the identity (either owner or entity) of
purchasing owner made at time of death
Purchase price received
generally doesn’t cause
taxable event3
Seller recognizes capital
gain to the extent
proceeds exceed basis
Value of business interest and possibly value of policies on other owners
depending on ownership structure
he tax deduction for interest expense on general borrowing may be reduced if the business owns life insurance contracts issued after June 8, 1997, on the lives of certain insureds.
T
Proceeds may be subject to corporate alternative minimum tax. Generally, the alternative minimum tax applies to corporations with average annual gross receipts in excess of $7.5 million for the prior three-year period.
3
If purchase price received is equal to value of business interest at death, there will be no income tax payable upon sale. Under the current law, basis step up at death is replaced by a modified carryover basis rule in 2010 only.
1
2
Cross Purchase
1
4
Owner A
(remaining)
Owner B
(departing)
3
2
2
3
Insurance
Policy(ies) on
Owner B
Insurance
Policy(ies) on
Owner B
2
2
1
Owner B
(departing)
4
3
Insurance
Policy(ies) on
Owner A
Wait and See Buy-Sell
Owner A
(remaining)
5
Insurance
Policy(ies) on
Owner A
1
2
1
Owner B
(departing)
2
4
• Remaining owners receive a basis increase equal to the purchase price paid to the
departing owner. This helps reduce taxes on a subsequent sale of the business.
2. Each owner may own, pay premiums on and be the beneficiary of an insurance policy(ies) on each other. Either life insurance,
disability insurance or both can be used.
3
• If three or more business owners are involved, multiple policies per owner are
required which may become cumbersome, and another form of buy-sell, such as
entity purchase, may be a solution.
How it works
Entity Purchase Considerations
1. Business enters into an entity purchase agreement with each owner obligating the business to purchase an owner’s interest in the
business after a triggering event. Each owner and/or owner’s estate agrees to sell the departing owner’s interest to the business.
• Only one policy per owner required, regardless of how many owners are involved.
2. The business purchases insurance protection on each owner. The business is the policy owner, the premium payer and beneficiary
of each policy.
• This could result in higher taxes on a subsequent sale of the business.
Insurance
Policy(ies) on
Owner B
• The business is the purchaser, thus remaining owners may not receive increased basis.
3. At a triggering event, the business may access cash value or collect death proceeds from the policy(ies).
• Depending on financial circumstances, creditors may be able to prevent the entity
from purchasing the interests of owners.
4. The business then pays an amount, determined by the terms of the entity purchase agreement, to the owner or owner’s estate.
The owner or the owner’s estate transfers the business interest to the business.
• Where family members will continue as owners, entity redemptions can receive
negative income tax treatment and should be considered carefully.
How it works
Wait and See Buy-Sell Considerations
1. Both the owners and the business enter into an agreement for the purchase of a deceased or departing owner’s interest that
obligates the departing owner or decedent’s estate to sell.
• Wait and see gives remaining owners the flexibility to select the most favorable
structure for the purchase of the departing owner’s business interest.
2. The business purchases insurance on each shareholder using an entity purchase approach.
• The added flexibility of a wait and see may create additional tax complications
which must be reviewed with the client’s advisor.
3. At the departure of owner B, the business may access cash value or (depending on the triggering event) receive death proceeds
from the policy(ies) on owner B.
Business
1
1. Owners enter into an agreement obligating the remaining owner(s) to purchase a departing owner’s interest.
4. The departing owner’s interest is transferred to the remaining owner.
1
Business
Cross Purchase Considerations
3. Upon a triggering event, policy values or death benefits owned by the remaining owner(s) may be used to purchase the interest of
the departing owner.
Insurance
Policy(ies) on
Owner A
Entity Purchase
Owner A
(remaining)
How it works
4. The business is given the option to purchase the stock from owner B or owner B’s estate within a certain period stated in the buysell agreement. The business can purchase all or a portion of the departing owner’s interest.
5. If the business chooses not to fully exercise its option, the remaining owner(s) is given an option to purchase all or some of the
remaining shares within a stated period of time.
OTE: To the extent any business interest remains, the business is obligated to complete the purchase, assuring 100% of the
N
departing owner’s interest will be acquired.
Exit Planning
Buy-Sell Agreement Comparison
A key component of an exit strategy is a buy-sell agreement. The agreement creates a
market for the business when a co-owner dies, becomes disabled or leaves the business.
A buy-sell agreement, properly structured and adequately funded with life and disability
insurance from the Principal Financial Group®, can help provide a solid landing platform for
your exit plan — and the people who depend on the future of your business.
Protection benefits of buy-sell agreements
• Family – You and your family can be protected by obligating co-owners to buy your
interest in the business for a set price and providing them the funding to do so if you die,
become disabled or leave the business.
• Co-owner – Co-owners gain protection by providing them the opportunity and funding to
purchase the business interest of a deceased, disabled or departing owner.
• Continuation – Minimize discord among owners by setting the price and terms of a sale when
an owner leaves the business.
• Business – Protect the business by preventing unwanted transfers to parties that might be unqualified or contentious, by limiting transfers of an interest in the business except under limited
circumstances.
WE’LL GIVE YOU AN EDGE®
• Estate – Fix the value of your business interest for estate tax purposes if the price meets IRS
guidelines at the time the agreement was signed.
Principal National Life Insurance Company and Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees
and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them
makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.
The subject matter in this communication is provided with the understanding that Principal® is not rendering legal, accounting, or tax advice.
You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements
Insurance products from the Principal Financial Group® (The Principal®) are issued by Principal National Life Insurance Co (except in NY) and
Principal Life Insurance Co, Des Moines, IA 50392. Securities offered through Principal Securities, Inc., 800-247-1737, member SIPC and/or
independent broker/dealers. Principal National, Principal Life and Principal Securities are members of the Principal Financial Group®,
Des Moines, IA 50392.
Not FDIC or NCUA insured
May lose value • Not a deposit • No bank or credit union guarantee
Not insured by any Federal government agency
BB9090-09 | 06/2016 | t16060601sz
Secure the future
For more than a century, The Principal® has helped businesses and individuals achieve their
personal and business objectives. You can count on our steadfast commitment to provide
quality, reasonably-priced financial products and services that help both businesses and
individuals plan a more secure future.
FOR MORE INFORMATION
Please contact your local financial professional