Are you the owner of a closely held or family owned business? Make sure a buy-sell agreement is part of your estate plan. It outlines the process for transferring ownership in the event of a “triggering event,” such as death, disability, divorce, termination of employment or withdrawal from the business.
A buy-sell agreement ensures an orderly transfer by allowing the company or remaining owners to purchase the departing owner’s interest, often funded life insurance. Since circumstances can change, it’s important to review your buy-sell agreement regularly to make sure it still meets your needs.
Valuation is key
Revisit the agreement’s valuation provision to reflect the current value of your business. The federal gift and estate tax exemption is scheduled to be halved in 2026, making this an urgent consideration.
As you review your agreement, pay attention to the method used to determine the purchase price—whether through independent appraisals, formulas, or a negotiated price.
tend to provide the most accurate values, while formulas may become outdated and less reliable which can lead to over- or underpayments if earnings have fluctuated substantially since the valuation date.
A negotiated price can be a good approach but may lead to disputes if owners can’t agree under potentially adversarial conditions. One option is to incorporate an independent appraisal if negotiations fail.
“Redemption” vs. “cross-purchase” agreement
The type of buy-sell agreement you select can have significant tax and estate planning effects. Generally, you’ll choose between a “redemption” agreement, where the company buys the departing owner’s share, or a “cross-purchase” agreement, where the remaining owners step in to make the purchase.
One disadvantage of cross-purchase agreements is that they can be complicated, especially with multiple owners. For example, If life insurance is used to fund the buyout, each owner will need to purchase a policy on the others. However, redemption agreements aren’t always the best solution as they can trigger unintended tax consequences.
A practical tool for business continuity
A buy-sell agreement is a flexible tool with several key benefits. It can help maintain ownership and control within your family, create a market for otherwise illiquid business interests, and provide the liquidity needed to cover estate taxes and other expenses. It also establishes the value of an ownership interest for estate tax purposes.
Contact your Smolin advisor to design a buy-sell agreement that preserves the value of your business for future generations.