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Accounting and Financial Planning for Law FirmsKickerFeaturesTopicsCommercial LawLaw Firm ManagementSectionsNewsLJN Newsletters

Section 79 Planning Opportunities

By Lawrence L. Bell, Theodore J. Zouzounis and Stephen M. (Pete) Peterson

Closely held businesses produce over 50% of the Gross National Product (“GNP”). Less than 50% of these businesses have a continuation plan and almost one-third of these companies (29%) use a buy-sell arrangement to assist in their planning. (See, Estate Planning Uses of Buy-Sell Agreements Funded with Life Insurance, Sabene Hitchcock-Gear, J.D., ALI-ABA, Oct. 28, 1999.) Buy-Sell agreements are very simple tools that over the years have grown to meet increasing needs of closely held businesses.

Buy-Sell Agreements try to address many of the following problems:

  • Death Buyout;
  • Disability Funding;
  • Withdrawal from Employment (for competitive or noncompetitive purposes);
  • Retirement Planning;
  • Tax Issues ' income, transfer, estate and gift;
  • Protection from Creditors (corporate and individual);
  • Fixing the Value of the Business Interest of the Owner; and
  • Settle Shareholder Differences.

These goals are disparate, and many of the tools currently available do not address all goals successfully. Generally speaking, a buy-sell agreement contains a restriction on the right to transfer a business interest during the life and at the death of the business owners, as well as an option, or other right, to acquire property at a specified price. The agreement typically sets the value of a closely held business for transfer tax purposes in the form of a fixed amount or a formula. Such a value may reflect the fair market value of the property at the time of the agreement (rather than a later date such as the date of the owner's death). The buy-sell agreement is often funded by life insurance policies.

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