This is our fourth form of a BUY-SELL AGREEMENT, The Trusteed Buy-Sell plan. Actually it’s a variation of our second type of Buy-Sell, a Cross Purchase Plan. However, there is ONE BIG DIFFERENCE. In the Trusteed form of a Buy-Sell, it is the TRUSTEE that is the Agent or owner of the funding mechanisms to fund a Buy-Sell Plan. Earlier we spoke about the CROSS-PURCHASE PLAN where the owners are the buyers and sellers in a Business Succession Plan. Here the TRUSTEE is the buyer and seller.
The big advantage of a Cross Purchase plan is AN INCREASE IN THE COST INCOME TAX BASIS. Each surviving shareholder or successor shareholder receives this new basis. Let me offer an example. Let’s assume that two owners start a business with a down payment of $10,000. Let’s further assume that the business grows to a value of $100,000. When one of the two decides to LEAVE THE BUSINESS, his new basis is now $100,000 and not the original $10,000! This is important because if the business is later sold for a higher amount, the end result will be LOWER INCOME TAXES.
The DISADVANTAGE OF THIS CROSS-PURCHASE IS WHEN THERE ARE MORE THAN TWO OR THREE OWNERS. Let’s say there are three owners, each owning one-third of the business. To make a Cross-Purchase Plan work, you need SIX BUY-SELL AGREEMENTS. Each owner would need an agreement on the other two partners. See how cumbersome this would be?
Enter in the TRUSTEED BUY-SELL PLAN. Here an independent TRUSTEE would hold an agreement on each of the owners. The ADVANTAGE is that EACH SURVIVING OWNER WILL RECEIVE AN INCREASE IN THE BASIS AND THERE WILL BE ONLY ONE AGREEMENT ON EACH SHAREHOLDER/PARTNER.
Each owner will sign an AGREEMENT WITH THE INDEPENDENT TRUSTEE. They will deliver their stock certificates to the TRUSTEE. If the agreement is FUNDED then the Trustee will receive investments from each sharholder to fund this Business Succession Plan. Upon a triggering event, the TRUSTEE collects the funds and distributes them to the surviving owners and sees to it that the company issues new shares to each of the surviving sharheolders in exchange for the shares which belonged to the departed shareholder.
Next up is a partial Stock Redemption Buy-Sell. Then we’ll do a comparison of the different Buy-Sell Plans. After which we’ll get into the FUN PART. THE MONEY PART or how to FUND the Buy-Sell.