What Is An Entity Purchase Agreement

Under this type of agreement, the company acquires life insurance on the life of each owner, based on the value of the owner`s ownership shares. In successful businesses, additional insurance would be purchased, as the value of the business has appreciated further. If many business owners wish to enjoy the benefits of a cross-purchase contract while avoiding the risks associated with a cross-purchase, the creation of a limited liability company managed by managers (“Insurance LLC”) should be considered in order to maintain and manage the insurance policies that ensure the lives of entrepreneurs. Existing policies owned by the owners can be transferred to Insurance LLC or new policies can be purchased by Insurance LLC. Each member of Insurance LLC is designated as the economic beneficiary of life insurance policies that insure other members whose interests in that member`s operating entity are required to purchase to death under the operator`s sales contract. Life insurance must also designate Insurance LLC as a beneficiary. Insurance LLC is owned by all policies that provide centralized management and creditor protection for policies it has taken out and avoids the inclusion of inheritance tax for their owners, benefits that are not otherwise available if individual owners own the policies. It also avoids poor tax results when an owner leaves the business and ownership of the directive needs to be adjusted. While incorporating an insurance LLC into a buyback contract can increase costs and complexity, the benefits of an insurance LLC can often outweigh those costs. Insurance LLC`s ownership is that of the operator and an independent person or agent should act as a manager.

Each member of Insurance LLC must make capital contributions equal to the life insurance premiums for which that member is designated as an economic beneficiary, in accordance with the obligation to purchase the member of the operator`s purchase-sale contract. If a policy has more than one economic beneficiary, each member`s contribution to insurance premiums should be proportional to the percentage of the member in the operating unit (if the buy-sell provides for a proportional purchase). example. A owns a 35% percentage of the operating entity and B holds a total of 5% of the operating company. A and B are the actual beneficiaries of a policy that ensures the life of C, with the annual premium of $1,000. To make an annual contribution of 875 USD (35% / 40% x 1,000 USD) and B a contribution of 125 DOLLARS (5% / 40% x 1,000 USD). As a general rule, the operator pays life insurance premiums on behalf of its owners to ensure that premiums are paid. Provisions may be included in the operator`s purchase-sale agreement, which requires the company to contribute to Insurance LLC on behalf of its members, and the company is required to treat these contributions as distributions to its owners who, as noted above, also own Insurance LLC. Each policy whose member is designated as an economic beneficiary and whose contribution to the payment of the insurance premium is deducted is held by a separate capital account.



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