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Before you execute a buy-sell agreement, make sure that you have adequately funded it.
To adequately fund your buy-sell agreement, take each event that would trigger your buy-sell agreement (death, disability, retirement, etc.) and ask yourself “If this event happened tomorrow, would there be enough available funds to purchase the shares?”
The most common mistake I find is a buy-sell agreement that can be triggered upon disability, but the company or shareholder (depending on whether the buy-sell agreement is a stock redemption or cross-purchase plan) relies solely on life insurance to fund the agreement.
A permanent life insurance policy’s cash value takes time to build. And if a shareholder becomes disabled before the cash value builds up, such a company may be forced to fund the buy-sell agreement in non-optimal ways.
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