Buy-sell agreement safeguards partners

THE building of wealth can take many different forms, not the least of which is the building of a business.

THE building of wealth can take many different forms, not the least of which is the building of a business.

Many business owners spend their entire working lives putting a large amount of effort into developing an operation. This effort is motivated by a whole host of reasons, from wanting to be captain of their own ship, to creating a secure future for their families.

Frequently, however, due to the pressures of running a business, little consideration is given to the extraction of value in the event of them dying or becoming disabled.

Obtaining fair market value in the event of a forced sale is difficult, if not impossible, for obvious reasons. A further concern for the surviving partners is the very real danger of having a partner, either in the form of the deceased's family or someone that they have sold to, forced upon them.

The solution is in the form of a buy-sell agreement, whereby members of a business obligate themselves to sell on their deaths (or disability) their interests to survivors and likewise obligate the survivors to buy the deceased members' interests.

There is now an obligation to enter into a contract which requires financing, the sources of which are many and varied, again with various cost implications.

The cheapest option by far is the use of life insurance whereby the partners, having entered into a contract, affect life policies on each others' lives to the value of the obligated amounts.

With regard to estate duty and capital gains tax, the following applies:

In terms of the Estate Duty Act, policies on the life of the deceased owned by a third party are deemed property in his estate. However, an exception is made in respect of policies effected to fund buy-sell agreements provided such policy meets the following:

l The policy is taken out or acquired by a person who, on the date of the death of the deceased, was a partner of the deceased, or held a share or an interest in the company in which the deceased, on that date, held a share or like interest;

l The policy was effected with the purpose of acquiring the deceased's interest in the partnership, or with the purpose of acquiring the whole or a part of the deceased's share or like interest in the company;

l No premium on the policy was paid or borne by the deceased.

A policy taken out in terms of a buy-sell agreement and that meets the necessary requirements will also not be subject to capital gains tax.

It must be noted that premiums or policies taken out in respect of a buy-sell agreement are not tax deductible and, therefore, the policies are paid out tax-free.

It is possible for a sole proprietor to enter into a buy-sell agreement with any person who has an interest in acquiring his business in the event of his death or disability.

Persons who may wish to enter into this type of agreement may be a supplier wishing to forward integrate and, therefore, secure a distribution channel or even a customer wishing to backward integrate and thereby secure supply channels.

l The writer is a director of Bryan Hirsch Colley