The basic problem
The simplest case would be two equal partners in a business, each owning 50% of the company. In the event of the death of one of the partners their ownership would probably pass through to their estate or the spouse of the deceased partner. The surviving partner is now in business with their partner's spouse, and the surviving spouse is now charged with trying to unload ownership in a company at fire sale prices.

The more complex & more common problem
Under the same partnership scenario with each owning 50% of the company.  What happens if a partner becomes disabled during the working years?  Statistically, disability is 7x more common than death during this period.  Now one partner takes on 100% of the company burden & may have to continue to pay the other partner.  Its easy to see the financial hardship and relationship issues that would be created. 

Buy Sell Agreement as a solution
Enter what is often called a buy sell agreement. An written agreement is put into place that requires the remaining owner to purchase the ownership from the deceased owner's spouse. In the same agreement, the spouse agrees to sell their ownership at a previously agreed upon price. In the event one of the partners dies, the remaining partner automatically gets complete ownership of the company and the surviving spouse gets paid a fair market value for their ownership in the company without any headaches. A very similar structure is used for disability events, but the terms vary greatly from one Buy/Sell agreement to another.

How to pay for this?
The next problem in this arrangement: how is the remaining owner going to make sure they can afford to buy out the spouse? The answer, with life insurance.  Each owner purchases life insurance on the life of the other partner. Assurances are put in place that any death benefit must be used to buy out the surviving spouse. Now in the event of the death of a partner, the insurance company pays the remaining partner the death benefit. The surviving spouse sells their ownership in the company to the remaining partner, who uses the death benefit to pay for it.

In the event of disability, income is replaced to the individual via a Disability Income insurance contract and to the business with Business Overhead Expense(BOE) coverage.

Be cautious! The above information is only a very simple concept outline of how you might start to structure such an agreement. You will need to have a competent attorney to draft the agreement and a knowledgeable accountant to handle valuation of the company as well as tax issues surrounding the insurance premium and death benefit. And of course an experienced business insurance broker to help tie this all together with cost effective coverage.

Contributed by Jim Richards, Campbell, Schoneberger & Assoc. Ltd. For more information, please contact Jim at www.CSAInsure.com or 480-967-7535.