In Post 172 , I pointed out the argument that stock subject to a buy-sell agreement is not an available resource due to the restrictions of the agreement.
I pointed out the rule for buy-sell agreements in that Post.
There are other aspects of a buy-sell agreement which do not relate directly to elder law and which I believe require further discussion.
One of the reasons for a buy-sell agreement is to get a stepped-up basis for the stock. This can be done by having what is called a cross-purchase agreement where each shareholder owns life insurance on the other. To the extent the life insurance owned by the other shareholder purchases stock of a decedent, the stock gets a stepped-up in basis. However, there may be a shortfall in payment due to the lack of adequate insurance of the other shareholder. In such case, insurance should be owned by the corporation.
This is called a “wait and see agreement”. Such agreement provides that the other shareholder purchases the stock to the extent of the insurance owned by the other shareholder. If there is a shortfall in the amount of the insurance, the insurance is purchased by the corporation. To the extent the insurance is purchased by the corporation, there is not a stepped-up in basis. However, there are advantages of having insurance owned by the corporation. For example, even if the stock owned by the living shareholder is sufficient to purchase the stock, the stock owned by the corporation can serve as “key man” insurance. That is, the value of the insurance can be used to replace the value of the deceased shareholder.
Moreover, stock owned by a corporation can be used to fund a disability “buyout”. That is, although many agreements do not provide for such provision, a buy-sell agreement should provide that if a shareholder becomes disabled, the stock is purchased by the corporation. Neither a disabled person nor a corporation wants such person to continue employment.
However, it is important that the word disability in the buy-sell agreement be consistent with the definition of disability in the disability buyout policy. That is, a disability buyout should be triggered by the definition of disability in the policy. Again, this is an example of the point that I have stressed that an elder law attorney must be familiar with various areas of law and corporate law is certainly an area to be understood as it relates to elder law issues.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© October 2012, Post 216