Buy-sell agreement
A contract among co-owners of a closely-held business dictating what happens to an owner's interest on death, disability, divorce, retirement, or sale. Funded with life insurance, buy-sell agreements keep family businesses in family hands and set a predictable estate-tax valuation.
A buy-sell agreement is a contract among the owners of a closely-held business that governs transfers of ownership interests on specific triggering events — typically death, disability, divorce, retirement, involuntary transfer (bankruptcy, creditor attachment), and sometimes voluntary sale. On the triggering event, the agreement dictates who buys the interest (the entity, other owners, or a designated successor), at what price, and on what payment terms.
Two basic structures: (1) Redemption — the entity itself buys the interest. Simpler for remaining owners but the entity has to have the cash and the redemption reduces the surviving owners' basis. (2) Cross-purchase — the other owners buy the interest directly. Each surviving owner gets a step-up in basis equal to the purchase price paid, but with N owners you need N*(N-1) life-insurance policies to fully fund, which gets unwieldy past 3-4 owners.
Funding with life insurance: the most common death-event funding approach. The entity (redemption) or each owner (cross-purchase) owns and pays premiums on life-insurance policies covering the other owners. On a death, the proceeds fund the purchase. Get the ownership structure right — policies owned by the wrong party trigger transfer-for-value problems under IRC § 101(a)(2) and can cause the death benefit to become taxable.
Estate-tax valuation: a buy-sell agreement can set the estate-tax value of the business interest under IRC § 2703(b) IF (1) it is a bona fide business arrangement, (2) it is not a device to transfer property to family members for less than full and adequate consideration, and (3) its terms are comparable to similar arrangements entered into in arm's-length transactions. Getting all three right is the drafting art.
Tagged 🟡 — the structure is well-understood and template language is widely available, but the insurance funding, IRC § 2703 compliance, and family-business dynamics warrant an attorney + insurance professional pairing.
State-specific notes
IRC § 2703(b) valuation safe harbor requires the buy-sell to be a bona fide business arrangement not serving as an intra-family device to transfer for less than full value, with terms comparable to arm's-length agreements.
Virginia corporate and LLC statutes (Title 13.1) enforce buy-sell agreements as contract law; no specific statutory requirements. Stock transfer restrictions should also be noted on share certificates or in the LLC operating agreement per Va. Code § 13.1-648.
West Virginia enforces buy-sell agreements under general contract law; LLC and corporate statutes at Chapters 31B and 31D govern entity-level formalities.
Buy-sell agreements are enforceable in Alabama under general contract principles and coordinated with the Alabama Business and Nonprofit Entities Code (Title 10A). For closely-held corporations, shareholder agreements are authorized under Ala. Code § 10A-2A-7.32; LLC operating agreements are authorized under Ala. Code § 10A-5A-1.08. Federal IRC § 2703 controls the estate-tax valuation peg regardless of state.