Buy-Sell Funding Calculator

Why the funded buy-sell exists

Every multi-owner business has an unwritten buy-sell agreement, whether the owners have signed a document or not. When one owner dies, becomes disabled, or wants out, the ownership transfers. The only question is whether the terms are set in advance and funded, or worked out in a courtroom with the deceased owner's family on the other side of the table. A funded buy-sell removes that uncertainty. Life insurance is the funding vehicle because it delivers a known dollar amount at the exact moment the trigger event occurs, mostly free of federal income tax.

Related reading: Buy-sell funding strategies and Buy-sell agreement life insurance.

Cross-purchase vs entity redemption

Cross-purchase means each owner personally owns a policy on every other owner. When an owner dies, the survivors receive tax-free proceeds and use them to purchase the deceased owner's interest directly from the estate. The survivors receive a stepped-up basis in the interest they purchase, which matters at the eventual sale. The trade-off is administrative complexity. For n owners, the structure needs n times n minus one policies. Three owners need six, four owners need twelve, five owners need twenty.

Entity redemption puts the policies on the business's balance sheet. The entity owns and is the beneficiary of one policy per owner. When an owner dies, the entity receives the death benefit and redeems the interest. The count is simpler, only n policies. The downside is that surviving owners do not receive a basis step-up on the redeemed interest, which can be meaningful in a later sale. Some corporate forms also trigger alternative minimum tax exposure on the death benefit.

Wait-and-see structures

Wait-and-see gives the entity the first option to redeem, then the individual owners, then the entity again, all under one agreement. It preserves flexibility to choose the more tax-efficient path at the moment of the trigger event. The insurance is typically owned in a way that supports either outcome, most commonly by the individual owners with an entity backstop.

Valuation is the fight worth having early

The purchase price should be defined in the agreement, not left to a family member and a lawyer to negotiate. Common approaches include a fixed price updated annually, a formula tied to book value or EBITDA multiples, and an independent appraisal at the trigger event. Whichever method is used, the amount of insurance needs to track it. A stale valuation and a stale death benefit is the most common way a funded buy-sell fails when it is finally called upon.

Transfer-for-value and existing policies

Moving an existing policy from one owner to another as part of a buy-sell redesign can trigger the transfer-for-value rule, which strips the tax-free death benefit under Section 101(a). Several safe harbors exist, including transfers to a partner or partnership, but the analysis is technical. Redesigning a buy-sell without walking through existing policies is a common way agents accidentally create a tax problem the client did not have.