New York Child Abuse Identification and Reporting Practice Exam

When should a buy-sell agreement include a provision for the buy-out of an owner's business interest?

1. When the owner decides to retire

2. When there is a buy-sell agreement funded with life insurance

3. When the owner wants to sell their share

4. When the business experiences financial difficulties

The correct answer is: When there is a buy-sell agreement funded with life insurance

A buy-sell agreement typically aims to manage the transitions of ownership in a business under specific circumstances, ensuring a smooth transfer of interests. Including a provision for the buy-out of an owner's business interest becomes essential when the agreement is funded with life insurance. This is because life insurance provides a readily available source of funds that can facilitate the buy-out in the unfortunate event of an owner's death, ensuring that the remaining owners can purchase the deceased owner's share without causing financial strain. This mechanism not only supports business continuity but also offers financial security for the deceased owner's family. The significance of using life insurance for this purpose lies in its ability to provide immediate liquidity at a time when the business may be under pressure, thus ensuring that the buy-out proceeds efficiently and on mutually agreed terms. This arrangement protects both the interests of the business and the families involved, ensuring the business can maintain its operations without disruption.