It is essential to get expert help when working with buy-sell agreements. Not doing so can lead to litigation and out-of-date funding mechanisms.
We were contacted by an attorney with concerns over the pay-out of a life insurance contract that was created to fund a buy-sell agreement. The company had purchased 3 policies covering the company’s partners, naming each partners’ spouse as the beneficiary of the policy. Several years later, one of the partners was tragically killed in an automobile accident. Three million in death benefits was paid to his widow.
The buy-sell agreement mentioned of “life insurance“ but provided no guidance tying the pay-out of the policy to the widow in exchange for the deceased partner’s share of the business. She demanded payment for her deceased husband’s share of the business, which laid the groundwork for litigation. Legal wrangling dragged on, and eventually the business was forced to close; the widow received one-third of the liquidation.
This case study should have had a different ending. The attorney contacted IZALE because he knows working with an insurance professional who is well versed how life insurance works in a buy-sell agreement is critical.
Over the years, we have seen buy-sell agreements with no funding mechanism, out of date valuations, as well as partners named in the agreement who are no longer involved in the business. We strongly encourage the use of buy-sell agreements as well as a review of their provisions every two years. The IZALE team can review yours and check that life insurance details don’t set the stage for future litigation.