The three types of buy-sell agreements are:
- Entity Buy-Sell
The business enters into a written agreement with the owners to purchase the interest of each owner in the event of disability, death, divorce or departure of a co-owner.
- Cross-Purchase Buy-Sell Agreement
Individual owners agree to purchase the interest of other owners. Each individual is the owner and beneficiary of a life insurance policy on each of the other owners, and the policy proceeds are used to pay the purchase price.
- Partnership Administration Succession Strategy (PASS)
Individual owners for a separate partnership and the partnership acquires life insurance policies on all the owner and administers the provisions of the buy-sell agreement. This approach has numerous tax and financial advantages compared to traditional stock redemption or cross-purchase agreements particularly in the case of C or S corporations with more than two owners.
Overview of this Concept
- PASS (Partnership Administration Succession Strategy) is an effective and tax-efficient strategy for setting up a buy-sell agreement.
- PASS involves the formation of a partnership/LLC between the individual business owners of a company.
- It illustrates what happens when a business owner dies or leaves the company.
- The concept highlights the benefits of life insurance and how it can be used with this strategy.
- This concept shows the following values:
- Composite values of all policies
- Cash value allocations for all business owners
- Summary of values for each individual policy