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Funding Buy/Sell Agreements — Purchase & Restrictive Transfer Agreements

“Buy/Sell Agreements” are internal contracts between members, shareholders or owners of a business that spell out what happens to the shares of a departing business owner. They are designed to address and mitigate the business problems that arise when one of the owners of a business dies, retires, becomes disabled or departs.

One of the problems that arise from such an agreement is funding. In many circumstances, a business can become quite lucrative, and thus an interest in the business is very expensive. Not everyone has piles of cash sitting around on standby to satisfy the buy-out.

Accordingly, life insurance or disability insurance on the interest holders is a common method for funding death or disability triggered purchases. Depending on how the Buy/Sell Agreement is structured, either the actual business entity itself or an individual is the beneficiary. Because insurance companies have an interesting tendency to deny/delay a claim, it is also important to include a supplemental method for payment when the insurance company decides to drag its feet or deny the claim.

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