R—Key Person Buy-Out Agreement

The key person buy-out agreement is one means of providing for the complete disposition of a business interest. Under this arrangement the owner agrees to sell all of his or her business interest to a key person.

DURING LIFETIME.To illustrate how this works, assume that we have a corporation owned by A. A would enter into an agreement providing for the sale to B, a key person in the business. Typically, this agreement isbindingand obligates both parties, or their representatives, upon the death, disability, or retirement of A.

Rather than trying to accumulate or borrow sufficient funds to buy A’s interest, B obtains a life insurance contract insuring A. B applies for this coverage, pays the premiums, and is both owner and beneficiary of the contract. By this means, B can use life insurance tofullyfund his or her obligation to A.