In this two‑minute tax and legal tip, Mark J. Kohler explains why a buy‑sell agreement is essential for small‑business partnerships, focusing on the cross‑purchase structure. He describes how two partners each purchase a life‑insurance policy on the other; upon a partner’s death the surviving partner receives the death benefit tax‑free, uses it to buy out the deceased partner’s family at a pre‑agreed price, and benefits from a stepped‑up basis. Kohler notes optional key‑person carve‑outs to preserve business viability. He also outlines practical drawbacks: complexity with more than two partners, differing ages and health affecting premium costs, and the need to balance allocations of draws or profit to keep the arrangement fair. He concludes by urging viewers to consult a legal planner, visit his website, and subscribe for more tax‑saving content.
Chapters
Hi, Mark Kohler here with another two minute tax and legal tip. Let's talk about buy sell agreements. Now this is a very important document that many partners don't implement in a small business. But it's absolutely critical to maintaining the viability of a business upon the death of one of the partners and also making sure that the surviving family of a deceased partner receive the value they're entitled to. Now with a planning mechanism like this, there's a lot of options and details, but I want to share with you the strategy I think is most applicable for the average small business partnership and that's the cross purchase buy sell agreement. Now in a situation like this, you'd have two partners who would buy a life insurance policy on the other and then upon the death of one of the partners, the surviving partner would receive the death benefit tax free. They could then take that death benefit and buy out the family of the deceased partner for a predetermined amount and they'd receive that tax free as well. Because of the stepped up basis value in the business. You can even carve out a few dollars for the surviving partner, kind of a key man provision to make sure that they have enough money to maintain the viability of the business again and the ongoing operations. Now of course in any situation like this there's a few drawbacks and that's in a partnership with multiple partners where it could be unwieldy buying all these different life insurance policies. Also in a partnership you may have differing partners health and also ages and the premiums could change dramatically between partners. So you want to make sure that you even things out and make sure it's fair with allocations of draws or profit to kind of square things up. But again, this is a really important strategy that many partners fail to implement and I encourage you to get with your legal planner and look at a buy sell agreement in your partnership today. Keep living the American dream. If you thought that information was amazing and helpful, I have so much more to share with you. Please look at the links below and head to my website markjkohler.com you can subscribe to my weekly newsletter. Check out my weekly radio show. I have my online videos for tax and legal strategies that'll save you thousands. Ways to learn QuickBooks with my fun videos online and also if you enjoyed it, please subscribe. Please leave a comment and give it a like and follow me on YouTube. I promise that these videos will change your life. Thanks so much.
