|
 |
 |
| Disability Buy Outs By Michael E. Stuneck |
|
There are three common ways to fund a disability buy-out agreement: 1. Sinking funds 2. Loans 3. Insurance A sinking fund can be used, but, not knowing when, if ever, the money would be used, it would be difficult to manage. You have to start building the fund right away, and it cannot be used for another purpose, if it is to be available for a buy-out. It would be expensive, since, other than any interest it might earn, there is no leverage on the money, and you would pay dollar-for-dollar to the disabled owner. In addition, since the purchase of a business interest is not a deductible expense, you must use after-tax dollars. Thus, in a 34% corporate tax bracket, the business would have to earn $151,515 to pay $100,000 after taxes. You could borrow the money, but a bank might shy away from loaning money to a business that had just lost an owner. In addition, you would pay more than dollar-for-dollar, since there would be interest as well as principal to pay back. The easiest and cheapest way to fund the buy-out is to use a disability buy-out insurance policy. The insurance company assumes the risk for growing and maintaining your pool of money, and the money arrives when you need it, in the form of an insurance benefit. The premiums would be a fraction of the amount needed to amass a sinking fund over a short period, and though the premium is not tax-deductible, the benefit is generally received, income-tax-free. The policy can be structured in a lump sum, in payments or in a combination of both. Since there is usually a one to two year elimination period or waiting period, before benefit is paid, premiums can be quite reasonable. The keys to this type of plan are in competent advice from legal, accounting and insurance professionals. The business must be valued and documents drawn up, in addition to the purchase of appropriate insurance products. This is a way to truly protect a business and its owners from a very real risk, at a reasonable cost, ensuring that the business continues for the benefit of all involved. |
| Back to Articles Page |