Buy-Sell Agreements – What Are They, and What Are the Benefits?

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A buy-sell agreement is a legally binding document between the key persons in a business (i.e. the business partners).

It acts as a succession planning tool to protect the business interest of each key person in the business and provides legal certainty for the families or estates of each key person.

It allows executors timely access to the business interest and insurance proceeds without causing delay and disruption to the existing owners and the business.

The agreement is usually connected with a critical person’s relevant life insurance policy.

The ‘triggering event’ is the most critical aspect of the agreement, as it represents the timing in which the insurance policy gets claimed. Examples of ‘triggering events’ include bankruptcy, divorce and retirement or death of a key person.

The agreement can be written for all business structures, including trusts, companies and partnerships.

Types of agreement:

  1. The cross-purchase agreement involves the existing/remaining business owner(s) buying out the key person’s business interest. The agreement will legally require the estate/executor of the deceased to sell and the existing owner(s) to buy the interest.
  2. Share buy-back agreement – this involves the company legally requiring to buy back the shares in the company from the key person or their estate/executor using the insurance proceeds. The buy-back will probably have a component of franked dividends included in the total.

Owner of the insurance policy – it can be in the name of the following entities:

  1. The key person holding the policy;
  2. The business partners holding each other’s policy (cross-purchase option);
  3. The Trustee of the Discretionary Trust is the equity holder of the business interest;
  4. The company is holding the policy (Share buy-back option).

Tax on insurance proceeds

The tax implication associated with cashing in the insurance policy will depend on issues such as the entity holding the policy and whether the policy covers trauma and total permanent disability (‘TPD’).

The Capital Gains Tax (‘CGT’) provisions usually apply here as the income tax rules are excluded since no deduction is claimed or allowed to be claimed on the insurance premium.

Below is a summary of the key tax issues:

Owner of the Policy and TypeTax Implications
Individual (Life, Trauma & TPD)Tax-Free
The policy held by cross-owner (Life only)Tax-free if paid to exist owners
It may be taxable if paid to the new owner or partner
The policy held by the cross-owner (Trauma & TPD)Taxable (50% CGT discount may be available)
Company (Life only)Tax-free to the company but will become taxable in shareholders’ hands as an unfranked dividend on liquidation
Company (Trauma & TPD)Taxable
TrustMaybe tax-free (with careful planning and proper agreement in place)
Trust (Trauma & TPD)Taxable (50% CGT discount may be available)

As always, please do not hesitate to contact us if you have questions relating to Buy-Sell Agreements or would like us to refer you to a solicitor to assist you with putting together the agreement.

Kreston Stanley Williamson Team

*Correct as of October 2016


This article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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