Buy-sell agreements
These agreements cover the situation where the proprietors of
the business contract to buy the interest or equity of another
proprietor if a specified event occurs. Usually the specified
event will be matters such as death, trauma or total or permanent
disability of a proprietor. To help finance the transfer
of the equity, the parties will often use insurance
policies.
The usual constituent documents for the business structure do
not deal adequately with these sorts of situations and that is why
such buy-sell agreements are necessary.
There are a number of models that can apply for financing such
agreements, usually:
- Cross insurance;
- Share/unit buybacks or redemptions;
- Special purpose trusts; or
- Self insurance
The self insurance model is often the preferred option.
There are a number of taxation issues to be considered in
structuring the arrangements. There can be a number of
insurance issues involved including the inability to obtain the
requisite cover at a reasonable cost.