BUSINESS PLANNINGBuy-Sell Agreements

The Concept Exchange

PLC.1497.01.05

A buy-sell is an agreement between you and the other owners of the business

which details what is to occur upon the death of one of the owners. Typically, the

buy-sell agreement provides that the surviving owners of the business will

purchase the deceased or withdrawing owner's share of the operation. The buy-

sell agreement provides assurance to the surviving owners that the business will

have capital to address key concerns, such as:

▼ Ensuring a market for deceased owner’s interest

▼ Setting a pre-determined price of ownership interest

▼ Helping to avoid disputes between heirs and business partners

▼ Providing liquidity for estate

▼ Possibly fix value of business interest for estate tax purposes

With the help of a properly structured buy-sell agreement, business owners like

yourself can enjoy the comfort and security that you may receive the maximum

benefit from the business that you worked so hard to establish.

Funding a Buy-Sell Agreement with Life InsuranceInformation Needed▼ Type of entity, i.e. C Corp, S Corp, Partnership, LLC, etc.

▼ Owner/Purchaser information – name, age, percentage of ownership,underwriting class, smoker/non-smoker.

Two Types of Buy-Sell Agreements▼ Cross Purchase Agreement

▼ Redemption Agreement

Many business owners are so focused on their company’s day-to-day needs thatthey forego planning for their future. One important planning need most businessowners should plan for is their business’ succession. What happens to the businessin the event of an owner’s death? If there are multiple owners, how do theremaining owners replace a key contributor to the business and insure that thedeceased owner’s business interest is appropriately valued and distributed tohis/her heirs? One way to help business owners like you plan for this event isthrough the use of a buy-sell agreement.

Neither Protective Life

Insurance Company

nor its representatives

offer legal or tax

advice. We recommend

you consult your legal

or tax advisor before

making any legal or

tax decisions.

Advantages ▼ Increase in basis for purchasing owner(s)

▼ No alternative minimum tax consequences

▼ No dividend treatment

Disadvantages ▼ Multiple life insurance policies may be needed for funding

▼ Premium prices may not be equal for each owner

▼ No increase in basis for remaining owner(s)

Income Tax Consequences to Owner – Cross Purchase AgreementGenerally, premiums are paid by owners with after-tax funds.

▼ Purchasing Owner

• Life insurance proceeds are generally not subject to income tax unless there has been a transfer-for-value.

• Basis in acquired interest is equal to purchase price

▼ Selling Owner/Selling owner’s estate

• Gain or loss recognized on sale based on terminating owner’s tax basis in interest. Deceased owner’s interestwill generally have a step up in basis. After 2009, interest may not be eligible for full step up in basis underEconomic Growth and Tax Relief Reconciliation Act of 2001 “EGTRRA” of 2001.

Estate Tax Consequences — Value of ownership interest may be fixed with a buy-sell agreement. Note there are very stringent rules for fixing estate tax values between related parties.

• The policy can be arranged so that the proceeds will not be included in the insured’s estate.

Cross-Purchase Agreement: Advantages & Disadvantages

Agreement Structure Agreement is between parties topurchase each owner’s interestupon triggering event, i.e. death,disability, retirement, etc.

Each party to the agreementowns an appropriate insurancepolicy on the other owner(s)

Resolution upon deathSurviving party (B) uses lifeinsurance proceeds to purchaseOwner A’s interest from familyor estate

Cross Purchase Agreement

COMPANY INSURANCE COMPANY

Owner A Owner Bagreement

premium payments

death proceeds

businessinterest

businessinterest

COMPANY INSURANCE COMPANY

Death ofOwner A

Owner B

A’s Familyor Estate

$

Advantages ▼ Business pays for premiums

▼ Only one life insurance policy per owner is needed

Disadvantages ▼ Possible Alternative Minimum Tax

▼ Possible dividend treatment to shareholders

Income Tax Consequences to Business – Redemption Agreement▼ No deduction is allowed for premiums paid to fund a buy-sell agreement.

▼ Life insurance proceeds are generally not subject to income tax unless there has been a transfer-for-value.

▼ If the business is a C Corporation, proceeds and cash value increases may be subject to Alternative Minimum Tax.

Income Tax Consequences to Owners – Redemption Agreement▼ Non-terminating Owner

• No step-up in basis for non-terminating owner’s increased interest

▼ Terminating Owner

• Possible dividend treatment at buyout if business is a corporation unless certain conditions are met.

• Gain or loss recognized on sale based on terminating owner’s tax basis in interest. Deceased owner’s interestwill generally have a step up in basis. After 2009, estate may not be eligible for full step up in basis underEGTRRA of 2001.

Estate Tax Consequences — Value of ownership interest may be fixed with a buy-sell agreement.Note there are very stringent rules for fixing estate tax values between related parties.

• Life insurance proceeds are not directly included in the insured’s estate when the business is the owner andbeneficiary.

Redemption Agreement: Advantages & Disadvantages

Agreement Structure Agreement is between ownersand Company for Company topurchase owners’ interest upontriggering event, i.e. death,retirement, etc.

Company owns a life insurancepolicy on each owner

Resolution upon deathCompany uses life insuranceproceeds to purchase businessinterest from deceased owner’sfamily or estate

Redemption Agreement/Entity Purchase Agreement

COMPANY

INSURANCE COMPANY

Owner A Owner B

agreement agreement

premium payments

deathproceeds

businessinterest

businessinterest

COMPANY INSURANCE COMPANY

Death ofOwner A

Owner B

A’s Familyor Estate

$

For more information, contact your Financial Representative.

A “wait-and-see” or hybrid agreement is generally drafted so that the business has the first option to purchase aterminating owner’s stock. If it doesn’t purchase all of the stock, the remaining owners have an option to do so. Ifthey fail to purchase all of the remaining stock, the business is required to purchase what’s left. Tax consequencesdepend on the approach actually executed, i.e. entity purchase or cross purchase.

Not FDIC Insured May Lose ValueNo Bank Guarantee

Wait-and-see/Hybrid Agreement

About ProtectiveProtective Life Insurance Company was established on a profound belief in the American dream. Since 1907,Protective Life Insurance Company has remained true to its core beliefs: quality, serving people, and growth. Thisunwavering commitment to treating people the way we would like to be treated has been rewarded with stable,long-term relationships and growth. Today, Protective Life is one of the nation’s leading insurance companies,proving the wisdom of our Company’s vision: Doing the right thing is smart business.®