Sales concepts

Buy-sell strategy for businesses with multiple owners

A buy-sell agreement is an asset that provides for the future sale of a business interest, typically between the existing owners of the business. Learn more.

When there are multiple owners of a business, an entity purchase buy-sell may make sense, especially if the owners are different ages and in different health.

How does the strategy work?

A buy-sell agreement is a contract that provides for the future sale of a business interest, typically between the existing owners of the business. In an entity purchase buy-sell agreement, the business purchases life insurance policies on the lives of each of the co-owners. The business pays the annual premiums and is the owner and beneficiary of the policies. Because the business owns the policies, the policy cash values can be shown as an asset on its books.

When one owner dies, the business uses the life insurance proceeds to purchase the business interest from the deceased owner’s estate, thus giving each surviving owner a larger share of the business.

Benefits of this strategy:

  • Easy to administer – Only one policy per person needs to be purchased.
  • Equalization of payments – Since the business pays the insurance premiums, each owner, in essence, pays the same amount for each policy.
  • Cash value is a business asset – The policy’s cash value will show up on the business’ balance sheet as an asset.

Considerations to keep in mind:

  • The policies and cash value are subject to creditors of the business.
  • Life insurance premiums are not tax deductible for the business.
  • The life insurance proceeds may increase the value of the business for estate tax purposes.
  • Given the 2024 Supreme Court Connelly decision, business owners may want to consider alternative buy-sell strategies before an entity purchase plan. Connelly held a corporation’s obligation to redeem a deceased shareholder’s shares is not a liability that reduces the corporation’s value for estate tax purposes and therefore the life insurance proceeds used to redeem the decedent’s shares were included in the value of those shares for estate tax purposes.

Strategy in action

  • Jessica, Kate, Myra and Emily are all 25% owners in Acme Operations. Their business has been appraised at $8 million. They want to establish a buy-sell agreement so that the other owners could continue the business if one of them passes away.
  • Acme Operations buys a $2 million life insurance policy on each owner. The business owns the policy, pays the premiums and is named beneficiary.
Buy-Sell flow chart.

Myra unexpectedly passes away a few years later…

  • Acme Operations receives the tax-free life insurance benefit of $2 million.
  • It divides Myra’s business shares among the remaining owners. Now Jessica, Kate and Emily each own one-third of the business.

Prospective client

  • Business with multiple owners
  • Wants a way to ensure that the business will continue if one of the owners passes away; wants to keep business ownership among the current owners
  • Wants to keep the administration of the buy-sell agreement easy, despite having multiple owners
  • Would like additional business assets on the books

Highlighted product(s) with this concept

BrightLife® Grow 
VUL Optimizer®

Financial Professional materials

Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose or avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and your clients should seek advice based on their particular circumstances from their own tax and legal advisors. 

Life insurance products are issued by Equitable Financial Life Insurance Company (New York, NY) or Equitable Financial Life Insurance Company of America (Equitable America), an Arizona stock company with an administrative location in Charlotte, NC and are co-distributed by Equitable Network, LLC (Equitable Network Insurance Agency of California in CA; Equitable Network Insurance Agency of Utah in UT; Equitable Network of Puerto Rico, Inc. in PR),  and Equitable Distributors, LLC. Variable Products are co-distributed by Equitable Advisors, LLC (Member FINRA, SIPC) (Equitable Financial Advisors in MI and TN) and Equitable Distributors, LLC. Equitable, Equitable America, Equitable Advisors, Equitable Network and Equitable Distributors do not provide tax or legal advice.

IU-6878343.1 (08/2024) (Exp. 08/2026)