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Buy-sell arrangement types

There is no one-size-fits-all solution

Understanding your client’s business and goals is key to implementing the right buy-sell strategy.


What is a buy-sell arrangement?

A buy-sell arrangement is an agreement between business owners to transfer ownership at such key life events as death, divorce and disability. A properly constructed and funded buy-sell arrangement generally:

1. Guarantees a buyer

Upon an owner’s death, retirement or disability.

2. Creates liquidity for the deceased owner’s family

It can require the business or surviving owners to purchase the deceased owner’s interest, allowing liquid assets to be distributed to the decedent’s family.

3. Avoids conflict of interest between the surviving owner(s) and the deceased owner’s family

A deceased owner’s family may want income from the business, while the surviving owners may want to reinvest all excess profits back into the business. A fully-executed buy-sell arrangement helps avoid such disputes.

4. Avoids valuation difficulties

Typically, a buy-sell arrangement which is negotiated at arm’s length determines the value of the business for estate tax purposes.

5. Solves lack of marketability issues

There is no established market for closely held stock, and generally no third party would be willing to purchase an interest — particularly a minority interest — in a closely held business immediately after the death of an owner-employee.

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How is a buy-sell arrangement funded?

Four buy-sell funding methods

1. Unfunded/installment purchase

The surviving owners or business purchases the deceased owner’s interest by installment. The installment method, however, could strain the business’s cash flow and drastically affect profits.

2. Side fund

The business or owners put money in a side fund to purchase the deceased or retired owner’s share upon an event such as death, disability or retirement. The business, however, may not have time to accumulate sufficient assets to fund the purchase. Also, retention of assets in a C corporation can trigger an accumulated earnings tax.

3. Third party financing

The business or the owners plan on borrowing funds from a third party to fund the buy-sell. But third party financing can be difficult to secure after an owner’s death. It may also restrict the ability to secure additional loans the business needs for expansion or working capital.

4. Life insurance

The business or the owners purchase life insurance on the owners’ lives to fund the buy-sell arrangement. If a permanent policy is used, the policy’s cash value may assist in the buyout at retirement. Using life insurance can be difficult if an owner is in poor health, since the cost of premiums could be higher than is justified.

Individual arrangements

Several factors determine what to select.


One-way buy-sell

Helps alleviate concerns about what will happen to a business when the sole owner dies.

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Stay bonus

A stay bonus strategy can help retain key employees by providing a financial incentive.

Learn about stay bonus
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Cross purchase buy-sell

A strategy for multi-owner businesses in which the owners enter into an agreement to cross-own life insurance on one another.

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Entity redemption buy-sell

A strategy for multi-owner businesses in which the business is the owner and beneficiary of a life insurance policy on each business owner’s life.

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Cross endorsed buy-sell

An arrangement in which each business owner purchases a policy on his or her own life, and “rents” a portion of the death benefit to the other owners.

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Lifecycle buy-sell

An arrangement that combines the benefits of the traditional entity redemption and cross purchase buy-sell strategies.

Learn about lifecycle

Business succession tools and resources

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it is accessible to the general public.

DOFU 10-2022