What Is A Stock Redemption Plan (Entity Plan)
A stock redemption or entity buy-sell agreement is a binding agreement that is implemented by the owners of a business to facilitate the orderly transition of a business interest in the event of the death, disability, or retirement of a business owner. With a stock redemption plan, the company agrees to purchase the interest of a business owner in the event his or her business interest becomes available due to death, disability, or retirement.
The entity agreement outlines the terms of the sale and establishes a formula for determining the actual sales price of the stock based on the company’s valuation. It also obligates the company to purchase the departing owner’s shares while at the same time mandating that the departing owner or their heirs sell their business interest back to the company.
Tax issues with stock redemption plans include:
- Life insurance policy premiums are not tax-deductible to the business.
- Any death benefit proceeds received by the business are generally received income tax-free.
- If the business is properly valued, the value defined in the buy-sell may likely be binding when calculating the estate tax value for income and estate tax purposes.
- Once a deceased owner’s shares are purchased, the remaining owners do not receive an increase in their cost basis for tax purposes.
Effective use of a property-funded entity buy-sell agreement will assure an efficient transition for your business. Without an established funded plan, your business will experience significant costs if a fellow business owner dies unexpectedly.
