Buy-sell agreements |
This is a contract between two or more business owners
that outlines the terms of ownership transfers in the event that
an owner retires, divorces, becomes disabled, dies or experiences
other changes in circumstances.
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Stock redemption |
This is a type of buy-sell agreement that occurs when the
corporation buys back stock from the shareholder or a deceased
shareholder's estate. Typically, the estate receives cash in
exchange for the stock.
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Cross purchase |
This type of buy-sell agreement calls for the remaining
shareholder(s) to buy the stock of the departing or deceased
shareholder. To fund such a plan, stockholders typically buy life and disability
insurance policies on each other. The surviving shareholder(s)
(not the corporation) purchases stock from the decedent's estate.
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Wait and see |
This is a hybrid agreement designed to give the
individuals the flexibility to determine the best possible
buy-sell plan at the exact moment needed — at the death of the
business owner.
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Gifts of corporate stock |
This is a lifetime gift, either outright or through a
trust, and is often the most effective way to reduce estate taxation.
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Life & disability insurance |
The advantage of life and disability insurance is that premiums are priced
relative to policy proceeds. The insurance is typically used to
fund buy-sell agreements.
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Private annuities |
This may be effectively used for family situations where a
parent wishes to transfer an asset such as a business interest to
the next generation free of estate taxes while receiving an income
for life.
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Self-canceling installment notes (SCIN) |
This is an installment debt obligation that by its terms
is extinguished at the death of the seller. It is similar to a
private annuity in that an asset is sold on an installment basis (however with a SCIN the installments are usually shorter than the seller's life expectancy.).
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Family partnerships |
This is used to shift both the income tax burden and the
appreciation of assets from parents to children or other family members.
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Management control |
A business owner may wish to transfer the equity in a
company to family members by gift, bequest or sale, yet the owner
may remain uncomfortable with the business insight of the new
shareholder. A number of management techniques are available to
deal with such concerns:
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- Voting agreements — This is one of the easiest and least
expensive options in accomplishing management control. The
contract specifically identifies the scope and duration of the
agreement and can control the shareholder's vote by creating a
voting block.
- Proxies — This is another management control tool. A
written authorization is given by a shareholder to another
person to vote on shareholder matters.
- Voting trusts — Parties to the voting trust agreement
surrender their stock to trustees who represent the parties to
the trust and vote the stock.
- Public offerings — When you have no family members to
carry on a successful privately held business, you can "go
public." This option poses numerous benefits as well as
drawbacks. A financial advisor can help you determine if a
public offering is your best solution.
- Employee Stock Ownership Plan (ESOP) — This is also
used when succession by a family member is not an option. An
Employee Stock Ownership Plan is a way to transfer the business
to employees with significant tax advantages.
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