Common Buy-Sell Planning example: Dave’s Construction Company (DCC) Dave is 40 and has been in the construction business for 10 years. He owns 100 percent of DCC stock that has an adjusted book value of $3 million. Dave has reinvested most profits and has accumulated few investment assets outside DCC. None of his three children are old enough for him to know if they will eventually come into the business with him. DCC has one key employee, Hal, who is 35. Dave is concerned about what would happen to his family as well as DCC, if he died. A local insurance agent is trying to convince him to give Hal one percent of the stock and set up an entity buy-sell agreement with DCC to purchase his stock, leaving Hal with all of the outstanding stock. DCC would own a $3 million life-insurance policy on Dave to fund this obligation. Dave wants a second opinion on this recommendation. The net result of the recommended buy-sell plan is to give a $3 million business to Hal, via DCCs (really Dave) purchase of life insurance and to have Dave’s family exchange $3 million in DCC’s stock for cash without otherwise adding any value to the estate. This is a great deal for Hal, but a horrible deal for Dave’s family. Instead, Dave should consider purchasing a $3 million life insurance policy to be owned by and payable in an irrevocable trust with his wife and children as the beneficiaries of this trust. Then privately instruct only his attorney, accountant and wife in writing, to work closely with Hal (since he knows the market and other construction firms) in the event of Dave’s untimely death to begin immediate negotiations for the sale or liquidation of DCC with Hal receiving substantial compensation for this service. In doing so, Hal may be able to secure key employment with DCC’s successor owner, including the possibility of a minority-ownership interest. What this does for Dave’s family is to secure the value of DCC in the form of life insurance in the irrevocable trust, plus the additional value that will probably come from the immediate sale or liquidation of DCC that might be close to the $3 million adjusted book value. By instructing his advisors and wife to move quickly to sell or liquidate DCC, with Hal’s full assistance, Dave has substantially increased the prospects of getting the maximum value for DCC with the greatest likelihood that DCC employees will still have their jobs because there is a definite and immediate plan in place to sell or liquidate DCC. For the same insurance costs Dave has potentially increased his estate by some $3 million for his family’s benefit rather than basically giving his company to Hal. Dave might consider whole life or universal life for the purchase of the life insurance policy in the irrevocable trust. While this planning is a good match for Dave’s current objectives it needs to be reviewed every few years to manage the performance of the life insurance policy properly, confirm Hal’s present key role and check whether one or more of Dave’s children might have entered the business.
Posted on: Sat, 20 Jul 2013 10:19:22 +0000
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