Many Lincoln businesses are built by partners who trust each other completely. What happens if one of them dies unexpectedly is a harder conversation. Without a plan, surviving owners may end up in business with heirs, and families may struggle to receive fair value. A buy-sell agreement funded with life insurance is one common way to plan ahead.
How a Buy-Sell Agreement Works
A buy-sell agreement is a contract that spells out what happens to an owner’s share of the business after certain events, such as death, disability, or retirement. Life insurance is often used to provide the funds needed to complete the purchase when an owner dies.
Two Common Structures
| Cross-Purchase | Entity-Purchase | |
|---|---|---|
| Who owns the policies | Each owner owns a policy on the other owners | The business owns a policy on each owner |
| Who buys the share | The surviving owners | The business itself |
| Number of policies | Can grow quickly as owners are added | Usually one policy per owner |
Some agreements use hybrid approaches. The right structure depends on the number of owners, the type of business entity, and tax considerations.
Details That Matter
Valuation
The agreement should explain how the business will be valued, whether by a set price, a formula, or an appraisal. A value that hasn’t been updated in years can leave the coverage amount out of step with the business.
Ownership and Beneficiaries
Policy owners and beneficiaries should match the agreement’s structure.
Recent Legal Changes
A 2024 U.S. Supreme Court decision affected how certain business-owned life insurance used for buyouts may be treated for estate tax purposes. Owners with entity-purchase arrangements should review them with their advisors.
Next Steps
- Work with an attorney to draft or update the agreement
- Involve a tax professional before choosing a structure
- Review coverage amounts whenever the business value changes
Forsyth Insurance Agency in Lincoln, NE can help business owners line up life insurance to support a buy-sell plan. Policy terms vary. Business owners across Lincoln, NE and Nebraska can reach out to Forsyth Insurance Agency anytime.
