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Mark redemption agreement template

welcome back to the Biff mini bites video series where we take five minutes to discuss each of the most important CFP exam topics I'm Mike long from the Boston Institute of Finance and in this mini bite we're going to take a quick look at one of the forms of a buy sell agreement that specifically an entity purchase buy sell agreement sometimes referred to as a stock redemption plan as it's often used in a corporate setting and the purpose of this is to be able to transfer the business to the remaining owners at the death of one of the the shareholders the owners at a fair price for the deceased family and then the surviving owners own a hundred percent of the outstanding stock after the execution of this and this is one of the simpler types of buy-sell agreements to to understand so we have our business owner has a business interest and so the business and the owner enter into it buy sell agreement in this case an entity purchase and what that means what that contract is about is at the death of this owner there is a contract for the stock to be sold back to the business the business to redeem the stock and a price that's negotiated between the the owner and the business and so what happens after that is the business will purchase a life insurance policy on that owner and the business pays the premiums to the insurance company and then at death the insurance company pays the business the proceeds in the amount needed to buy out the deceased owners estate so that's what's that's how the cash is used the money comes in from the insurance company and the business buys the redeems the stock at the agreed-upon price and that business own business interest is retired to Treasury stock basically so what that means is then the the other owners the remaining shareholders now own a hundred percent of the outstanding stock in this business it's a very efficient way to transfer business interest that is fair to the owners estate and is also fair to the businesses itself without these sometimes businesses find themselves in in business with that deceased deceased owners family or some other person this is just a very good way to transfer ownership in that business one side note on this that might make a good exam question is in this type of buy sell agreement for the remaining owners the remaining shareholders their basis does not increase even though when this stock is redeemed their individual ownership shares are now more highly valued because they own a hundred percent of the company after that stock is brought back in but their basis does not increase so the exam question should be that this has been executed they'll give you all the values surrounding this but what are the remaining owners interest basis in the interest in this business and I'll contrast that in another mini by about cross purchase buy-sell agreements in which there is an increase in basis so again something just with a little practice you understand what these test questions would look like and and how the flow goes with the insurance and the cash back to the business owners of state thanks for listening the full mini video series and many other great study resources including our very popular Biff bytes podcast can be found at Biff bytes com we hope you take advantage of those resources and enjoy using them study on my friends