Buy-Sell Agreements: Life Insurance for Your Business

What happens to your business in the event that you or your business partner were to pass away? Buy-sell agreements cover what happens to the business in the event of the death of one of the business owners. A lot of business owners in Johnson City, Tennessee have asked me about buy-sell agreements, so I wanted to take some time to explain exactly what they are.

Buy-Sell Agreements

A buy-sell agreement is a life insurance policy for the continuation of your business. It is an agreement you have with other shareholders or your business partner where you either set a time where they will buy your business, or you agree that they will buy it upon your death. In general, most spouses do not want to own your business. Further, most shareholders and partners do not want the spouse to be their new partner. The spouse would rather have the cash, and your business partner or shareholder would rather have the business.

How Do They Work?

To understand buy-sell agreements better, let’s look at a few scenarios.

In the first scenario, we have business owner A, business owner B, and the business where each owner owns half the business. Each business owner has a life policy on the other. It is important to note that you must pay this life policy with after-tax dollars. The business owners would pay, for example, one thousand dollars per year extra (resulting in some small tax consequences). The owner would write a check out of his own checking account so that the proceeds are tax free back to him. This means that you should never write this off as a business expense on your taxes, but rather view it as a personal expense.

Let’s say Owner A passes away. Owner B receives money from the life insurance policy he or she purchased on the life of Owner A. Owner B will pay Owner A’s family for the ownership. If it is a $500,000 policy, Owner B will pay $500,000 to Owner A’s family. The family will face some tax consequences, which they should talk to their CPA about, but Owner B is getting the whole $500,000 tax free. Now Owner B owns 100% of the business. If Owner B were to sell the business, he would sell it with a step-up basis. This means that he pays $0 in taxes on the increase in cost he now has in the business (again, check with your CPA on this).

The situation is a little different when you have 3 owners (Owners A, B, and C). Each owner owns a third of the business and a third of the stock. The business also has treasury stock. Each business owner would have a life insurance policy on them which the business would pay. This is not tax deductible. Let’s say Owner C passes away. The business would get the life insurance proceeds tax free because the policy was paid for with after-tax dollars. The business then pays Owner C’s family the money they received from the policy. Owner C’s stock is then “sold” back to the business by his or her family so that each owner has 50% of the outstanding issued stock, and thereby owns 50% of the business. Keep in mind, the remaining owners do not receive step-up value from the agreement.

In summary, you should always pay the premium with after-tax dollars – never write it off on your taxes. That way, you can receive the proceeds tax free. Also, you should carefully consider the benefits of step-up value when setting up these policies.

Learn More

If you have any more questions amount buy-sell agreements, or other questions regarding your business or personal/family insurance, contact our Tri-Cities office today at (423) 292-4142, or email us at help@veritasrm.com. We will be glad to help you make sure you have the coverage you need.

Staying Safe at Work

When was the last time you collided with somebody going through a door, or bumped or tripped over something at work? Quite recently, I imagine. It happens all the time. It’s just one of the hazards those of us who go out to work every day face. Usually, these bumps and scrapes are not serious. However, well over 3.5 million people end up in hospital emergency departments each year as a result of occupational injuries.

In an ideal world, your workplace should be a source of fulfillment and even, dare I say it, fun. But at the very least, it should be the place from which you arrive home safely every day. You ought to take necessary precautions to protect yourself and your fellow coworkers.

Company Safety Rules

Mostly, we count on employers to provide us with safe workplaces, to conform to health and safety legislation, and to provide facilities for emergency treatment – from first aid kits to resuscitators. But, there’s also a lot that we as individuals can do to protect ourselves from on-the-job hazards or to help others in the case of an emergency.

I’m not just talking about exercising caution when opening and shutting doors or keeping your eyes peeled for obstacles, though these are important. Employees should be more broadly aware of company safety rules and know how to respond to emergencies.

Your employer might provide written safety guidelines, which you should always make time to read. There could also be qualified first-aiders nearby that you should get to know. Further, you should know where first aid supplies and fire extinguishers are stored, and the layout of emergency escape routes.

6 Guidelines to Follow

Here are a few more guidelines for you to consider:

Wear appropriate clothing for the job. For instance: no loose items near machinery. Use eye protection, hard-hats, safety masks, and reinforced shoes when appropriate. Never cut corners or think you can make do with anything less than regulations or common sense stipulate.

Monitor your workplace temperature and environment. If it’s too hot or too cold, too stuffy, or there are unfamiliar odors, alert your supervisor or senior worker.

Use the right tools for the job. And by that I mean everything from a letter opener and staple remover to electrical appliances. If you don’t know how to use a tool properly, then ask. Additionally, always store sharp items, like scissors, when not in use.

Mitigate potential hazards. Don’t leave objects where other people (or you!) might collide with them. If you spot an obvious hazard, move it if permissible and appropriate, or try to make others aware of it (perhaps by using a warning cone or a simple sign).

If you have allergies (e.g. latex) or phobias (e.g. confined spaces), ensure that your employer and colleagues know.

Finally, if you are injured or feel unwell, especially if you are dizzy or suffering severe head or chest pains, tell someone immediately. Time is of the essence if something serious, like a stroke or heart attack, threatens. There are no points for keeping your mouth shut and being a hero.

Protect Yourself

You will find more useful information on workplace safety at the Centers for Disease Control and Prevention website. You can also think about becoming a first aider yourself – your local Red Cross chapter can tell you how.

If you are a business owner or employer in the Tri-Cities or elsewhere, be sure your business carries workers compensation insurance. This provides the coverage you need to protect your Tennessee business in the event of a work-related injury.

If you have any questions about workplace safety or workers compensation insurance, please contact our Johnson City office at (423) 292-4142, or send an email to help@veritasrm.com. We would be happy to give you more information and help you with any of your questions.

Who is Responsible for a Fallen Tree?

Determining whether all your insurance needs are covered can be confusing at times. One thing we get asked about a lot is liability for fallen tree damage. Every year, homeowners have trees that fall in storms. Unfortunately, this often results in damaged property. In the event of a treefall, who is responsible for the damage and removal, and what can insurance do to cover the costs?

Who is Liable?

No matter whose yard the tree was in, if it falls into your yard and damages any property, it is your homeowner policy’s responsibility to cover the loss. Because of the liability clause in any home policy, unless the owner of the property where the tree was knew that the tree was about to fall or that it needed to be taken down, they are not liable for any damage it might have caused your property. Thus, if one of your trees falls into your neighbor’s yard without you having any previous knowledge that it was going to fall, you are not liable for your neighbor’s damages (and vice versa). Think about it this way: the homeowner where the tree was had no control over the damage that the tree caused, so their insurance cannot be responsible either.

The Coverage You Need

Let’s say your neighbor’s tree fell in a windstorm into your yard. You are liable for the damage, but what can you do to fix the problem? Most insurance policies only cover up to $500, $1000, or $1500 dollars for tree removal if the tree did not damage any property. However, if the tree hit your fence, house, or car, these damages will be covered under your home or auto insurance policies.

If you have any further questions about this or anything else, please contact our Johnson City office at (423) 292-4142, or email us at help@veritasrm.com. We will be glad to answer any questions you have and help you make sure you have the coverage you need.