Certainly, having a Buy and Sell Agreement (BSA) has many advantages, many of which I have discussed in our past posts (May 2019, Advantages of Buy and Sell Agreements). However, I would like to go over the disadvantages of a BSA.
RESTRICTIONS ON ESTATE PLANNING
BSA can restrict ownership transfers and consequently management duties. These restrictions can be applied to you also. The restrictions could limit your personal planning by limiting your options for the ownership interests during your lifetime or at death. It may prohibit you from making gifts of your ownership interest to your family. Depending on your planning, your BSA could limit your plans to leave ownership interest to your family. The BSA may require your ownership interest to be sold at your death.
RESTRICTIONS ON FINANCIAL PLANNING
A BSA can restrict the persons to whom you could sell your ownership interest to and restrict when you can sell it. An example would be in a situation that you need to sell your interest because you’re in a financial bind. The BSA may require you to sell to your entity or your co-owners, who may not want to buy.
Special election to the defer federal state tax of deceased owners
This could limit an estate owner from using Code Section 6166 which is a way of paying your estate tax over a period of time, giving you the option of paying over a 15-year period, five years of deferral and a ten-year payout. A purchase from your estate could cause the loss of the right to defer the estate taxes.
A sale of Corporate interests may result in a loss of the entities corporate structure
This could limit the entities right to use its own loss carry back and carry forward losses on a significant change in ownership, which is possible without a well throughout BSA.
The cost of putting together a BSA
It takes time and money to put together a solid buy and sell agreement, Of course this is a disadvantage and it can be expensive, however, in order to have an optimal BSA, you will need to invest time and money. You will also need a competent council to prepare the necessary documents. This incurs costs. Being educated in this strategy is to your advantage when designing your BSA.
A poorly drafted buy sell agreement can be costly: By failing to carefully work out the terms of buy-sell agreement or by having mismatches between triggering events and the identity of the purchaser versus the funding source, a real mess could be created.
[i] Buy -Sell Agreements for Baby Boomer Business Owners Z. Christopher Mercer, ASA, CFA, ABAR