A Buy/Sell arrangement is a vital component of business estate planning, designed to ensure a seamless ownership transition from one business partner to another when one of them dies or becomes seriously ill or injured and cannot continue working in the business. This contractual agreement, often backed by personal insurance, provides a funding mechanism that allows the remaining owners to buy out the departing partner’s share, protecting both the business and the departing partner’s estate.
Why it matters:
Buy/Sell insurance mitigates risks such as forced business sales, legal disputes over valuations, and unwanted involvement from a deceased partner’s family. It ensures fair compensation and uninterrupted business operations.
Types of cover include:
- Life insurance (death)
- TPD insurance (total and permanent disablement)
- Trauma insurance (critical illnesses like heart attack, cancers or stroke)
In the event of a claim, the proceeds from the insurance policy are paid to the policy owner. Ownership structures vary, including self-ownership, cross-ownership, insurance trusts, and business entity ownership – each with implications for control, tax, and premium payments. Matching the insurance structure with a well-documented Buy/Sell or shareholders’ agreement is essential.
Tax and valuation considerations are complex. Insurance premiums are generally not tax-deductible, and insurance proceeds may attract income or capital gains tax. Regular business valuations ensure coverage remains adequate.
Professional advice is key. Financial advisers, accountants, business valuers and solicitors must collaborate to tailor arrangements that suit the unique needs of the business structure and ownership dynamics.
This article first appeared in the Spring 2025 issue of HLB Mann Judd’s Client Alert.
Brendan Bate (ASIC No. 1272327) and HLB Wealth Pty Ltd (ASIC No. 428645) are Authorised Representatives of Paragem Pty Ltd (“Paragem”), ABN 16 108 571 875, AFSL No. 297276.
Disclaimer: The information contained in this article has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. Before you make any decision regarding any information, strategies or products mentioned in this article, you should consult your financial adviser to consider whether that is appropriate having regard to your personal objectives, financial situation and needs. Please note that any audit, taxation and accounting services are provided by HLB Mann Judd and are not within the authority of Paragem’s AFSL No. 297276.