TN Life Insurance-Funding a Buy Sell Agreement

Do you have a buy-sell agreement? Is it Funded?

An agreement to sell a partner's interest in a Tennessee business in the event of premature death can be accomplished by a written:

Buy-Sell Agreement
Cross-Purchase Agreement
Entity-Purchase Agreement

These agreements provide a business arrangement in which one person or entity agrees to "buy" and the other party agrees to "sell" an interest in a Tennessee business, at a pre-determined price.

Many Tennessee businesses have one of these written agreements in place, but there is one very important problem - there are no funds to execute the agreement.

Funding a Tennessee Buy-Sell With Life Insurance

Normally, each partner or owner applies for life insurance on the lives of each of the other co-owners. In the event of the death of an owner, the life insurance proceeds are paid to the remaining owners and his/her interest in the Tennessee business is actually sold to the surviving owners.

Let's look at a Tennessee business with three partners - Partner "A"; Partner "B"; and Partner "C".

Here's how life insurance would be purchased:

Partner "A" would buy life insurance policies on Partners "B" and "C"
Partner "B" would buy life insurance policies on Partners "A" and "C"
Partner "C" would buy life insurance policies on Partners "A" and "B"

In the event of the premature death of either partner, the remaining partners, after receiving the life insurance proceeds, would have the assets to purchase the deceased partner's interest in the Tennessee business.

Life Insurance and the Cross-Purchase Agreement
The main difference here is that a Cross-Purchase Agreement normally involves stockholders of Tennessee corporations. Each stockholder purchases life insurance on each of the other stockholders. At the death of a stockholder, the surviving stockholders receive the proceeds from the life insurance policy which is used to purchase the deceased stockholder's interest in the Tennessee corporation.

Life Insurance and the Entity-Purchase Agreement

In this situation, the Tennessee business (entity) buys life insurance policies on the lives of the owners. Upon the death of an owner, the proceeds from the life insurance are paid to the Tennessee business, which are used to purchase the deceased partner's share of the business.