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.