Remember when we discussed Business Succession in the event of a premature death? There we said that a continuation agreement could be made either one of two basic ways. The business owners could make a succession plan between themselves. Alternatively the owners could enter into an agreement between each owner and the business. The same holds true for a disability buy-out. However, for a disability buy-out, there are a few different twists.
Usually a Disability Buy-out occurs after a much longer time period. Here the continuation plan is not triggered until 366 days or 731 days. After the specified time has elapsed, then the buy-out is initiated. That is why it is very important that each owner have their own disability income policies. The financial and psychological drain on the company would be enormous having to use dividends to support the disabled owner before the buy-out is completed.
A specified price is set based on each owners share in the business. The pay-out can be made in a number of ways. First there can be a lump sum payment based on the disabled owner’s interest or share in the business. The other way could have payments made over a period of monthly installments over 12, 24, 36 48 or 60 months. This benefit payment election is made at the time of the application, and combinations of benefits can be made by using multiple contracts.
This is a very critical area of a Business Succession plan because the chances of being permanently disabled far exceed the chances of a premature death. Lastly, remember the expense of such disability policies can be deducted as a business expense. Be sure to consult your accountant and also an attorney.