Keep Your Business Moving When an Owner Leaves

Buy-sell agreement insurance is the cash source that lets an owner’s share be bought when a trigger happens. For Tampa owners, that trigger can be a death, a disability, a retirement or an exit. This page explains how the funding works, the tax and cash-flow points a CPA firm reviews, and what a coverage review covers.

What Does a Buy-Sell Agreement Do for Tampa Businesses?

A buy-sell agreement is a contract among owners that sets how a departing owner’s share is sold and who buys it. It names the events that start a sale, such as death, disability, retirement, divorce or a voluntary exit. Each event should set a price or a way to set one.

An agreement on paper does not pay for anything. When a trigger happens, the buyer still needs cash. That is why many owners tie the agreement to a funding source, such as life insurance.

Many Tampa companies are closely held. That means a few partners, family members or key employees hold the shares. If one owner dies, the shares could pass to heirs who never worked in the business. A written agreement with a funding plan gives the surviving owners a clear path to buy those shares instead.

For a Florida corporation, a shareholder agreement that relies on Florida shareholder agreement rules to depart from the corporate statute must meet them; that section does not limit or invalidate agreements that are otherwise valid without it. It must either be set out or referenced in the articles of incorporation or bylaws and approved by all shareholders at the time, or be set out in a written agreement signed by all shareholders at the time and made known to the corporation.

How Does Life Insurance Fund the Buyout?

Life insurance pays a death benefit the buyer can use to buy the deceased owner’s shares. Two structures do this most often: cross-purchase and entity redemption.

In a cross-purchase, each owner buys a policy on every other owner and owns it personally. With three owners, each person holds two policies. The count grows fast as owners are added, and so do the premiums.

In an entity redemption, the business owns one policy on each owner. When an owner dies, the company receives the proceeds and buys back the shares. That needs fewer policies, but the company holds them, not the owners.

Business-owned coverage needs written consent. Florida law lets a business entity insure owners, officers, partners, managers or key persons only if those people consent in writing before the policy is bought. The business or its affiliate or subsidiary may not retaliate or take adverse action against any key employee or key person who does not consent to the insurance on that person’s life. See Florida insurable interest law.

The right structure depends on how many owners there are, what the governing documents say and what the owners want. A coverage review works through those points first.

What Tax and Cash-Flow Questions Should Owners Ask?

Death benefits are generally left out of gross income, but transfers and estate rules can change that result. The IRS states that federal law generally excludes these benefits from income, and that interest on the proceeds is taxable.

Transfers are a common trap. Separately from Florida law, federal tax law in 26 U.S.C. § 101(a)(2), often called the transfer-for-value rule, generally limits the death benefit a new owner can exclude from gross income, when a policy changes hands for valuable consideration, to the amount paid for the policy plus the premiums and other amounts that owner pays afterward, subject to the exceptions written into that federal provision. Section 627.404 says the insurable interest need not exist after the inception date of coverage under the contract; it does not list transfer exceptions, so review any transfer before it happens.

Proceeds can also count in the owner’s estate.

If owners choose an S corporation, shareholders generally must be individuals under federal tax rules, which have their own exceptions. Section 627.404 defines a business entity to include, but not be limited to, a joint venture, partnership, corporation, limited liability company, and business trust, but it does not set S corporation eligibility, so ownership structure matters.

Premiums are a steady cash cost. Owners should decide whether the business or the owner pays them. The accounting practice reviews this side along with the tax points. Insurance is offered by the licensed agent, separately from the accounting practice. Under Fla. Stat. § 473.3205, a CPA firm that accepts a commission on a sale must disclose that to the client in writing.

Term or Whole Life for a Buy-Sell Plan?

Term life covers a set period. Whole life usually lasts for the insured’s life, as long as the policy stays in force. Either type can fund a buyout, depending on the plan.

Term fits a known window, such as the years until an owner plans to retire or until a loan to the buyer is repaid. Coverage ends when the term ends. Renewal and age-based premium changes depend on the policy, so read them before you choose.

Whole life builds cash value that is separate from the death benefit. Dividends on a participating policy are not guaranteed. An illustration should show guaranteed and non-guaranteed values apart. Every limitation should carry the same emphasis as the benefits. Florida law makes it an unfair or deceptive act to knowingly circulate an illustration that misrepresents a policy’s benefits or terms.

What Happens in a Coverage Review With Nischay Rawal?

Nischay Rawal is the licensed insurance agent for these policies. A coverage review matches the funding to the agreement.

The review starts with the current agreement, the number of owners, the valuation method and the agreed price. It then measures the funding gap: the difference between the buyout price and the cash available when a trigger happens.

Health questions are required for these policies, and issue may depend on insurability. Business-owned coverage is fully underwritten, so each owner’s health history matters.

Any specific policy discussed is tied to its insurer and policy form, so owners see exactly what they’re considering. Our support staff, including assistants and office staff, handle scheduling and paperwork. Insurance is offered separately from the accounting practice.

Contact the Office About Your Buy-Sell Agreement

An agreement with no funding behind it leaves the buyout to chance. A buy-sell agreement and the life insurance that funds it can be reviewed together, so the two documents are coordinated. A coverage review with our office is a good place to start that discussion. Either way, the surviving owners and family members would need a clear plan for handling the buyout. Closing that gap before a trigger protects the people who depend on the business.

Contact NR CPAs & Business Advisors to set up a coverage review of your buy-sell funding.