Wait and See Buy Sell Agreement

A Wait and See Buy Sell Agreement is a hybrid arrangement combining the features of both the entity purchase buy-sell arrangement and the cross-purchase buy-sell arrangement. A wait and see buy-sell arrangement generally gives the entity the option (or “right of refusal”) to buy any portion of the deceased owner’s interest within a certain time period after the owner’s death. If the entity does not fully exercise the option, the remaining owners have the second right of refusal. Finally, if the remaining owners do not exercise their right of refusal, then the entity must redeem the balance of the deceased owner’s interest. Depending upon how the arrangement is funded and whether the entity or the surviving owners acquire the deceased owner’s interest, the arrangement will function as either an entity redemption or a cross-purchase arrangement.

Maximum Flexibility

The primary advantage of the wait and see buy-sell arrangement is that it offers maximum flexibility. Rather than committing to an arrangement, the business owners can adopt the most advantageous strategy after the death of an owner.

Difficult to Fund

One disadvantage of a wait and see buy-sell arrangement is that it can be difficult to fund. Ordinarily, the arrangement is funded as if it were a traditional cross-purchase arrangement. If it later appears likely that the entity will exercise its option, the policies can usually be sold to the entity. Generally, funding should be at the owner level for two reasons:

  1. If the wait and see agreement is funded at the entity level, all the potential problems of an entity purchase arrangement apply.
  2. If the life insurance policy is cross-owned, the owners will receive basis credit for their purchase of the interest or they could make a capital contribution to the entity and receive a basis step-up for the capital contribution.

Possible Dividend Treatment

Care must be taken to avoid dividend treatment to the purchasing shareholders. If the corporation is given the right of first refusal and the shareholders are required to purchase the stock if the corporation does not exercise its right, a corporate redemption will be treated as a dividend to the remaining shareholders. In addition, such arrangements must also be carefully structured to avoid possible dividend treatment to selling shareholders (as with an ordinary entity purchase arrangement).

How It Works

Establishing and Funding the Plan

Step 1

The Company establishes a wait-and-see purchase agreement with Shareholder A & B.

Step 2

Funding can be at the entity level (Company buys life insurance on Shareholder A & B) or funding can be at the individual level (Shareholder A& B buy life insurance policies on each other).

Wait and See Buy Sell Agreement

At Death

Step 3

Assuming Shareholder A dies first, their interest pass to their estate.

Step 4

The policy owner (regardless of whether it is the corporation or Shareholder B) receives the proceeds of the policy insuring Shareholder A’s life as the beneficiary. Shareholder A’s interest is then purchase in these steps:

  • First, the Company may exercise its option to purchase any or all of the decedent’s (Shareholder A’s) interest.
  • If the Company does not buy all of the deceased shareholder’s interest, the surviving shareholder(s) has the option to purchase it.
  • The Company must redeem any remaining interest. Any entity purchase is usually funded with capital contributed by the surviving shareholder(s) from insurance proceeds.

Wait and See Buy Sell Arrangement

Result

Either the business or surviving owner purchase the business interest from the decease owner’s estate, depending on which is most advantageous to the Company and the surviving owner.

Next Steps

Designing a business continuation plan is a crucial step to ensure your business remains intact at your retirement, death or other triggering event. Whether you leave your business by choice or by chance, you’ll leave your business on track and help provide for your family’s future. With an entity purchase (stock redemption) arrangement, you can help protect yourself, your business, co-owners and your family.

Talk to learn more contact an HNW Life Insurance Professional at (877) 579-9574 or submit an online request to schedule a time to discuss your particular situation.

Note: For policies issued after August 17, 2006, IRC 101(j) provides that death benefits from an “employer-owned life insurance” policy are income taxable in excess of premiums paid, unless an exception applies and certain notice and consent requirements are met before the policy is issued. Please consult your tax or legal advisors for more information.