Buy & Sell Agreements THE NEED FOR DISABILITY PROVISIONS Most of us are aware of the problems created by the death of an active, business shareholder in a close corporation. Here are just a few of the problems that could be incurred by the death of a shareholder: The heirs of the deceased may pass to family members whose views are not shared by the remaining stockholders A minor may be in direct line of inheritance and then there are the complications of a guardian and the courts. A competitor may be in a position to buy into the business because the surviving shareholders do not have adequate funds available to live on. Even more complex are the problems that arise if a shareholder or business owner becomes seriously disabled.  A productive shareholder can become a disabled person whose primary interest is getting an adequate income.  The active shareholders have to take on the disabled person's workload.  The disabled person needs a full income plus money to cover the extra expenses created by the disability. Where no valid provision has been made, the disabled shareholder cannot even be paid a deductible salary. Only non-deductible taxable dividends can be paid. Usually, such a disability will cause a loss of profits to the business. At the same time, there is a need to pay for the disabled person's replacement. The disability increases the cash needs of the disabled stockholder and the business itself. HOW OFTEN DOES DISABILITY STRIKE? Odds of a death* or at least one long-term** disability occurring before age 65, expressed as a number of chances of 1,000*** Two Lives Three Lives Average duration of Long-term Disability****  Ages Chances Ages  Chances 30-30 960 30-30-30 992  4 years 40-40 927  40-40-40 982 4 1/2 years 50-50 824 50-50-50 937 5 1/2 years 60-60 527 60-60-60 675 6 1/2 years***** * Based on CSO '58 Table of Mortality ** Lasting 90 days or more *** Based on 1964 Commissioner's Disability Table **** Institute for Business Planning, Inc. ***** Based on Age 59 THE SOLUTION -- THE BUY-SELL AGREEMENT If the shareholders of the corporation establish a binding and adequately funded Buy-Sell Agreement before a shareholder dies or becomes seriously disabled, the remaining active shareholders do not have to face the problems just outlined. Upon the death of a shareholder, the deceased's family is paid a previously agreed upon fair amount. The same is true for disability if it is included in the Agreement. ADVANTAGE OF DISABILITY BUY-SELL TO THE ACTIVE SHAREHOLDERS  They obtain the business interest stock at a known and defined price.  They keep voting control.  Family members are kept out of the business.  Competitors can't buy into the business.  There is business continuity - which is attractive to customers, creditors and employees.  Insurance provides dollars without using other assets.  Cash Flow is not disrupted. The disabled shareholder's family also gains by being able to sell at a definite price. In addition, they do not have to become involved in the business. They also have the money to pay for medical bills and living costs of the disabled. The shareholder's estate is protected instead of depleted. WHY FUND THE BUY-SELL AGREEMENT WITH INSURANCE? Buy-Sell Agreement is worthless unless sufficient funds are available exactly when they are needed -- upon the death or after prolonged disability of an active shareholder. In the case of a shareholder's death, only life insurance will automatically provide the dollars to fund the buy-out -- whether it happens tomorrow, next year or thirty years from now. In the case of disability, disability income insurance (combined with life insurance with waiver of premium) is the most certain source of dollars to fund a buy-out. IN CONCLUSION Injury and illness strike without warning. Without preparation, the results can be disastrous to one's personal and professional life. Disability can generate huge hospital, medical, pharmaceutical, and surgical bills. It leaves the family without a breadwinner, and drives family members into the labor market, causing domestic duties to be neglected. Unbearable strain is put on the family's ability to meet the ordinary living expenses of rent, food, clothing, transportation, education and entertainment. Assets are consumed trying to satisfy these obligations. At a time when their value is more apparent, conditions may require the premature surrender of life insurance policies. In addition to the havoc illness can play with a household, it can also destroy a business built over a lifetime. Suddenly, the corporation is deprived of the services of the individual who gave it direction from its inception. The absence of the trusted merchant causes customers to seek other sources of supply; employees fear for the fate of the business and search for more secure positions. Without the active participation of the disabled party, the enterprise may find that its lines of credit have evaporated. Continued income or dividend distributions by the disabled party may be too much for the business to bear. For these reasons, a prudent business owner should buy disability protection. While disability is a tragedy whenever it strikes, proper planning can soften its impact