Buy-Sell Agreements

Structuring Buy-Sell Agreements in the Partnership Context

This paper will discuss the various aspects of buy-sell agreements in the context of partnerships. The main topics which will be discussed concern the Federal tax ramifications of buy-sell agreements in partnerships; namely, the taxation effects on the partnership, the selling partner, and the purchaser. The characteristics of the different types of buy-sell agreements will be examined in the light of these effects, as well as with regard to the non-tax effects on the parties to the agreements.

The first part of the paper will give a general overview of partnerships and their characteristics. The second part of the paper will discus the taxation of partnership interest transactions. In this part, the differences between the liquidation and sale of partnership interests will be examined, with the particular focus being on the taxation consequences of each. The third part of the paper will evaluate the buy-sell agreement in general, examining some of the considerations which go into drafting buy-sell agreements. Also in this section, the basic differences between cross-purchase and partnership purchase agreements will be discussed. The fourth part of the paper will examine the funding of buy-sell agreements, particularly the use of insurance. The fifth part of the paper will discuss the estate planning involving buy-sell agreements. A subpart will examine the recently enacted tax code provisions concerning

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t the partnership or partners are obliged to purchase. Usually, however, the agreement will establish an obligation to purchase in order to meet the estate's liquidity needs. Similarly, mandatory purchase is often provided for in the case of disability, if funding is available. Mandatory purchase is almost never provided for in the event of a voluntary withdrawal, since such a fixed obligation would represent a contingent liability unacceptable to the other partners or the partnership. Cross-Purchase v. Partnership Purchase There are essentially two basic kinds of buy-sell agreements: cross-purchase and partnership purchase. In a cross-purchase agreement, the parties agree that the selling partner will sell his or her interest in the partnership to the other partners, with each taking an appropriate share of the interest. In a partnership purchase agreement, the parties agree that the selling partner will sell his or her interest in the partnership to the partnership entity itself. Although the end result is again an increase in the interest of the other partners, the tax consequences of these two types of agreements substantially differ. Although the sale of a partnership interest to the other partners is treated as a sa

Category: Business - B