Plan Ownership Changes Before They Happen

A buy-sell agreement is a contract that sets the terms for buying out an owner’s share of a business when a set event happens. Life insurance is one common way to fund that buyout. This page explains how the pieces fit together in Florida and what to check before you rely on them.

What a Buy-Sell Agreement Is and Who It Is For

A buy-sell agreement is a contract among business owners. It names the events that trigger a buyout, such as death, disability, retirement, departure, divorce or a sale to an outsider. The triggers and the price depend on how the agreement is written.

Florida recognizes shareholder agreements that follow Fla. Stat. § 607.0732. That section requires the agreement’s existence to be noted conspicuously on share certificates or on the information statement for uncertificated shares.

Partnerships have a default rule too. When a partner leaves without ending the partnership, Fla. Stat. § 620.8701 requires the partnership to buy that partner’s interest at a buyout price set by statute.

This arrangement fits co-owners of closely held Florida companies, family-owned businesses, professional practices and partnerships with more than one owner. Ask three questions: who buys, at what price, and how the money gets paid. Life insurance is one answer to the last question. The agreement itself is a legal document, and this page is general information, not tax or legal advice.

How Life Insurance Funds a Buy-Sell Agreement

Life insurance can provide money to complete a buyout when an insured owner dies. The two most common structures are cross-purchase and entity redemption.

• Cross-purchase: each owner owns a policy on the other owners. Ownership and beneficiary choices must match the agreement’s terms.
• Entity redemption: the business owns and pays for a policy on each owner. The business may use the proceeds to buy back the interest, subject to the agreement and the policy.
• Hybrid approaches also exist. The right structure depends on the entity type, the number of owners and the agreement’s wording.

Florida limits who can insure whom. A business entity may insure an owner or key person only if that person consents in writing before the insurance is bought. The entity may not retaliate against someone who refuses (Fla. Stat. § 627.404).

Tax results depend on the policy, the business structure and the individual’s circumstances, and exceptions apply. Premium deductibility and the tax treatment of a death benefit are not automatic. Estate inclusion can also turn on ownership. Under IRC § 2042, insurance payable to other beneficiaries can be included in the gross estate if the decedent held incidents of ownership at death. This is general information, not tax advice.

Permanent policies may build cash value under the contract. That value includes guaranteed and non-guaranteed amounts.

What the Policy Covers and What to Check

Check that the insured owner, the policy owner, the beneficiary and the policy amount all match the agreement’s purpose.

• Price method. Agreements set price by formula, appraisal or fixed value. For federal estate tax purposes, a decedent’s interest in a business, such as a partnership or a proprietorship, is valued at the net amount a willing buyer would pay a willing seller, with neither one compelled to act and both reasonably informed of the relevant facts. That net value rests on all relevant factors, including a fair appraisal of the business’s tangible and intangible assets (goodwill among them) as of the valuation date and the business’s demonstrated earning capacity (Treas. Reg. § 20.2031-3).
• Stale values. If the agreed value has not been updated, the policy amount may not match the buyout price.
• Insurability. Health questions are required. Issue may depend on insurability, and the insurer decides that through underwriting.
• Starting point only. Some owners begin with a valuation-based figure or an income-based estimate. That is a rough starting point, not the amount your business needs. The right amount depends on what the agreement must fund.
• Future changes. Any later increase in coverage depends on insurability and circumstances at that time. No increase is assured.
• Policy loans. A loan can reduce cash value and the death benefit. Under Fla. Stat. § 627.458, if loan debt reaches the loan value, the policy may end, but only after at least 30 days’ notice. That section does not apply to term policies.
• Premiums. Premiums depend on the insurer, the policy, underwriting and individual circumstances. This page gives no premium figures.

What to Expect: From First Contact to a Funded Policy

The process runs from a coverage review to documents, insurer selection, application and underwriting. Timing depends on the insurer, and no timeline is guaranteed.

1. First contact. Describe the business, the owners and any existing agreement.
2. Coverage review. Nischay Rawal reviews ownership, the valuation method and the funding structure.
3. Documents. Gather entity papers, ownership percentages, current valuations and owner details that underwriting may request.
4. Illustrations. Illustrations show guaranteed and non-guaranteed amounts. Dividends, where a policy pays them, are not guaranteed. We review illustrations with you directly.
5. Application. Health questions are required, and medical requirements may apply. The insurer decides issue through underwriting.
6. Plan on another review when ownership or values change.

How NR CPAs & Business Advisors Approaches Buy-Sell Funding

NR CPAs & Business Advisors is a Miami CPA firm that advises business owners on tax and cash-flow questions. The firm also helps families and owners review life insurance.

Insurance is offered by Nischay Rawal, a licensed insurance agent, separate from the firm’s accounting practice. Florida law allows a person to act as or advertise as an insurance agent only when currently licensed and appointed (Fla. Stat. § 626.112).

Our team includes assistants and office staff. Insurance agents may receive commissions. A CPA firm that accepts a commission for a product sold to a client must disclose that in writing (Fla. Stat. § 473.3205). We offer no rebates or other inducements to buy.

This page and the coverage review are general information. Ownership, valuation and funding choices depend on your specific facts.

Common Questions About Buy-Sell Agreement Insurance

Start Your Buy-Sell Coverage Review

If your buy-sell agreement is signed but no matching life insurance is in place, or an owner has joined or left, a coverage review is the next step. Call us today or use the contact page to request one with Nischay Rawal. Owners in Miami, Fort Lauderdale, West Palm Beach, Orlando, Tampa and Jacksonville can reach us the same way.

Insurance is offered through Nischay Rawal, a Florida-licensed insurance agent, separate from the accounting practice. Coverage, premiums and benefits depend on the issuing insurer’s underwriting and the policy’s terms. Florida law (Fla. Stat. 626.99(4)) provides a 14-day review period for life insurance policies. How that period applies to a particular policy depends on the issuing insurer’s policy terms. This page is general information, not tax advice.