| The advantages of a buy-sell agreement are well | | | | trust beneficiaries and to manage the affairs of the |
| known to owners of closely-held businesses and their | | | | business in a prudent and unbiased manner. They |
| advisors. First, a buy-sell agreement creates a | | | | should also have the power to sell the business if |
| "market" for what would otherwise be an | | | | they deem a sale is in the best interests of the trust |
| unmarketable asset. Second, a buy-sell agreement | | | | beneficiaries. While this arrangement leaves the active |
| assures that the financial security of the deceased or | | | | children in complete control of the business, their |
| withdrawing owner's family will not be tied to the | | | | fiduciary obligations must be considered in each and |
| future success of the business. This is particularly | | | | every action that they take. |
| important to the business owner who feels that the | | | | - Specify in the trust agreement the salaries, bonuses |
| business will likely flounder in his/her absence. Third, | | | | and fringe benefits that the active children will be |
| the remaining owners do not want to be in business | | | | entitled to receive from the business, as well as their |
| with a withdrawn, and now inactive, "partner" nor | | | | managerial duties and responsibilities. Dividends |
| with a deceased owner's spouse or children. Finally, if | | | | (profits) can be paid to the beneficiaries when |
| properly designed and drafted, a buy-sell agreement | | | | appropriate. |
| can help fix the value of a deceased owner's interest | | | | - Specify in the trust agreement what is to happen |
| for estate tax purposes. | | | | to the business should all the special trustees die, |
| However, there are many situations in which the | | | | become disabled, or resign. For example, should the |
| owners of a family business (with active and inactive | | | | business be put up for sale at such time? Should the |
| children) may not want a buy-sell agreement. For | | | | voting interests be distributed to all children equally? |
| example, if the value of the business is rising rapidly, | | | | Or, should the special trustees be permitted to |
| it may become too expensive for the active children | | | | appoint their successors (based on certain objective |
| to fund the buy-sell agreement. This is particularly | | | | criteria such as prior experience with the business)? |
| true where, because of age or health, a business | | | | The no-sell/buy-sell also works well in a second |
| owner is either uninsurable or highly rated. In such | | | | generation family business. Let's assume two |
| case, the buy-sell agreement can provide for an | | | | brothers, Frank and Jesse, have inherited a family |
| extended installment pay-out. But, this results in a | | | | business and both have children who are active in the |
| deceased owner's spouse (and inactive children) being | | | | business. If Frank and Jesse enter into a standard |
| subject to the risk of the active children's business | | | | buy-sell agreement, the last brother standing (and |
| acumen. It also raises the possibility that there will be | | | | eventually his children) ends up with the business. |
| insufficient cash to pay estate taxes and to meet | | | | Instead, as described above, Frank can bequeath his |
| the needs of the deceased owner's surviving spouse. | | | | voting and non-voting interests (in trust) to his |
| Another such situation is when an upstart business is | | | | children, and then name his brother as the "special |
| likely to have a bright future. This could be the result | | | | trustee" to vote the voting interests. Jesse can do |
| of a technology breakthrough, a new and very | | | | likewise. |
| favorable long-term contract, or the gaining popularity | | | | One of the keys to making sure that the no-sell |
| of a new product or idea. The momentum of such | | | | buy-sell works successfully is to ensure that there will |
| growth may have little to do with the business | | | | be sufficient liquid funds to support the business |
| acumen or effort of the active children. In such case, | | | | owner's surviving spouse and to cover the |
| the forced buy-out of a deceased senior member's | | | | anticipated estate tax liability at the death of the |
| interest may unfairly deprive the decedent's spouse | | | | surviving spouse. Providing the surviving spouse with |
| and active children of the fair value of the growing | | | | an adequate source of income will also reduce the |
| business. | | | | pressure on the business to produce the same. The |
| In addition, selling the business to the active children | | | | premiums that would have been paid to fund a |
| may be a double-edged sword. On the one hand, it's | | | | buy-sell agreement with life insurance can instead be |
| possible that the children who purchase the business | | | | used to fund an irrevocable life insurance trust (ILIT) |
| will end up with a larger inheritance if the business | | | | on the business owner's life. The benefits of this |
| flourishes. Conversely, if the business flounders, the | | | | approach include the following: |
| inactive children may end up with more than the | | | | - The insurance proceeds will provide the deceased |
| active children. Finally, for those business owners who | | | | business owner's spouse and family with income and |
| desire that all of their children be treated equally, a | | | | principal as needed, while keeping the family business |
| buy-sell agreement may not make sense. | | | | in the family. |
| Following are the steps family business owners can | | | | - The assets owned by the ILIT will not be subject |
| follow when the decision is made to leave the | | | | to creditor claims coming through the business, the |
| business to all of their children, but to allow the active | | | | deceased business owner, or the ILIT beneficiaries. |
| children to run the business without interference from | | | | - The life insurance proceeds will be received by the |
| the inactive children: | | | | ILIT both income and estate tax free. |
| - Recapitalize the business so that there are voting | | | | - If established to provide generation-skipping |
| interests and non-voting interests, with the | | | | advantages, ILIT assets will escape estate taxation |
| non-voting interests representing 90%-95% of the | | | | in the estates of future generations. |
| issued and outstanding interests. | | | | - At the death of the business owner's surviving |
| - Bequeath the non-voting interests equally among all | | | | spouse, the funds in the ILIT could be used to |
| of the children. To help reduce estate taxes, gift | | | | purchase assets from the business owner's estate, |
| non-voting interests during the business owner's | | | | thereby providing the estate with sufficient liquidity |
| lifetime. In either case, transfer to generation-skipping | | | | to pay its federal estate taxes and administration |
| trusts to protect the children from creditors, divorce | | | | expenses. |
| and their own estate taxes. | | | | While the no-sell/buy-sell may not work for |
| - Hold the voting interests in trust for all children, but | | | | everyone, it is a unique and potentially beneficial |
| appoint the active children the "special trustees" to | | | | alternative to the traditional automatic buy-out upon |
| vote those interests. Depending on the facts and | | | | the death or retirement of the business owner. The |
| circumstances, this trust can be created at the | | | | benefits to the participants, including the surviving |
| business owner's death or upon the death of the | | | | owners, can be substantial. No longer need the last |
| survivor of the business owner and his/her spouse. | | | | man standing be the big winner. |
| The active children, as special trustees, will have a | | | | THIS ARTICLE MAY NOT BE USED FOR PENALTY |
| fiduciary duty to act in the best interests of the | | | | PROTECTION. |