Q: If life insurance is being used as a funding vehicle, should that language be contained in the buy-sell agreement or in the policy language?

Answer: 

In my experience, life insurance policies specify who the beneficiary will be.  It is critical that the buy-sell agreement specify clearly how the proceeds should be treated.  Chapter 15 of Buy-Sell Agreements for Closely Held and Family Business Owners talks about the issue in some detail.  The point is that, absent clarity in the buy-sell agreement, one party or the other (or both) will tend to think that the agreement should have specified the treatment most favorable to them.

What parties don’t want, or likely should not want, is for the selected business appraiser to make that important decision. I can say with absolute certainty that I don’t want to make that kind of decision for parties to an agreement.  However, if the agreement not clear, someone, the appraiser or a court, will have to make it.

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For more information on this topic and other topics related to buy-sell agreements, check out Buy-Sell Agreements for Closely Held and Family Business Owners.

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This series, “Ask Chris Mercer,” is derived from the Q&A session of the May 16, 2012 webinar, “Buy-Sell Agreements” sponsored by WealthCounsel and attended by over 600.  

If you have a question for Chris, feel free to email him directly here.