Is it Possible to Fund a Buy-Sell Agreement with a Personally Owned Policy?
Situation: Nearly all buy-sell agreements that use life insurance as a funding vehicle do not have the business owner owning their own policy. In an entity purchase arrangement (where the business buys back/redeems a departing owner’s interest), the business is the owner and beneficiary. In a cross purchase arrangement (where the remaining owners purchase interest of the departing owner), the other owners of the business own the policy. The entity purchase and cross purchase buy-sell methods are well known and provide business owners and their tax and legal advisors with predictable results. Furthermore, since the potential purchasers need to make sure they have the funds to satisfy their legal obligations to purchase the business, it makes sense for them to own and control the life insurance policy.
In spite of the fact that the above classic buy-sell life insurance structures provide predictable results, it’s not unusual to find business owners wanting control over their policies in order to avoid running into problems. Our Counselor’s Corner will shed some light on the subject.
