Apollon Wealth Management on paying for a partner's buyout: funding the agreement

What age or exit date makes the funding urgent?

Funding becomes urgent when a trigger gets a date. Buy-sell agreement funding means naming a cash source for every trigger: life insurance for death, disability buyout cover or company cash for disability, and company cash, a seller note or a bank loan for a partner who leaves alive. Life insurance pays only at death, so it can never fund a voluntary exit by itself.

Maybe you've asked the benefits staff or the 401(k) administrator who pays what in a buyout, and got a shrug. That's common: they run payroll and plans, not your ownership agreement, and none of them has read the trigger list or the price clause.

Take Raj, a hypothetical 47-year-old whose partner wants out within two years. That's a lifetime trigger. Until closing, the death trigger is still live and still unfunded. A second test we use: when the buyout price is more than two years of company earnings, operating cash alone can't cover it.

Then the tax lens. For each source, write down who pays (company or owner), whether the payment is deductible, and what basis the surviving owner ends up with. If you can't fill in those three lines for a trigger, that trigger fails the check and goes to the top of the list.

Two owners with the same $2 million question

Both arrive asking how to fund a $2,000,000 buyout of a 50 percent partner. Raj and Sharon (hypothetical) are 47 and 45, with three children under 15. Raj's IT managed-services firm is valued around $4,000,000, and his partner says he'll leave within two years. The agreement has no money behind the buyout.

The second client, also hypothetical, is a pair of co-owners aged 58 and 60 in a dental lab with no exit date. Death or disability is the likelier trigger there, so cross-purchase life insurance becomes the main source. Each owner who buys with the death benefit gets a basis equal to the price paid. In a redemption, the company buys the shares and the remaining owner's basis does not rise by the price.

What changes and what doesn't? Premiums are nondeductible in both cases. The basis result differs, and it shows up as tax cost only when the survivor sells later. If the company is an S corporation, the basis math runs through the K-1, so the CPA confirms the numbers. No funding plan guarantees the company's value, and a later sale price can be lower than the agreement price.

Raj and Sharon's worked test case

A hypothetical couple, Raj and Sharon, find that Raj's firm (an S corporation, assumed) owns an old $250,000 key-person policy on his partner, with a $40,000 cash value and $36,000 of premiums paid. The partner plans to leave alive within two years, so the policy pays nothing toward his $2,000,000 price.

Surrendering it creates a $4,000 gain ($40,000 minus $36,000), which passes through as $2,000 to each owner. Handing the policy to the partner at $40,000 as part of his price creates the same $4,000 gain, so no tax is saved. But a transfer to the insured keeps his death benefit income-tax free, and the cash the company owes falls to $1,960,000 ($2,000,000 minus $40,000).

The rest is an upfront payment from company cash plus a note for the balance. Raj also adds personal term coverage on himself, so Sharon isn't left holding the note if he dies before it's paid.

The calendar below answers one question: which dates in a year touch this plan? Notice that the premium anniversary and the valuation date are set by the policy and the agreement, not by tax season, so they're easy to miss.

The mistake we see here is one of order. Cancelling the old policy the month the partner announces his exit, before bridge coverage and closing terms are in place, saves a few premiums and still triggers the $4,000 gain. If he dies before closing, the company owes the full $2,000,000 death buyout with no proceeds at all.

The old policy and the $4,000 gain

Which dates repeat every year

Six checks Apollon Wealth Management runs on a buy-sell agreement, in order

First, we read the agreement's triggers, price clause and valuation date, and you receive a one-page list of triggers. Second, we put a likely date and a cash source next to each one. Third, we price the tax line of each source: premiums are nondeductible when the payer is a beneficiary (section 264 of the Internal Revenue Code), a premium paid as a bonus is deductible to the company but taxable wages to the owner, and cross-purchase and redemption leave different basis.

Fourth, we check the price against section 2703 (a bona fide arrangement, not a device to pass value to family, comparable to arm's-length terms) and against Connelly v. United States, where company-owned proceeds raised the company's estate tax value. With each estate far below the $15,000,000 federal exclusion for 2026, Connelly mostly changes the numbers, not the tax owed.

Fifth, we check every existing policy for transfer-for-value traps before anyone moves ownership. Sixth, we hand a written summary to your attorney and CPA, who draft and file. Then the agreement price and policies go on the agenda of each progress meeting.

One habit comes from our one-decision-at-a-time approach: we put only the decision with the nearest deadline in front of you, with its numbers, and leave the others on the list until their turn.

Checks one to three: triggers, dates, tax lines

Checks four to six: price, policies, handoff

How much of the premium can the company deduct?

None, when the company owns the policy and is its beneficiary (section 264). Routing a cross-purchase premium through payroll as a bonus makes it deductible to the company and taxable to the owner, so the tax moves from one line to another and isn't saved. Choose the route by cash flow and basis, not by the deduction.

If there's no co-owner or no date yet

A sole owner has no buy-sell to fund. Neither do partners with a signed sale to an outside buyer closing within months, because the purchase contract does that work. They can update the agreed price, keep a copy of the agreement with the policy statements, and come back when a trigger gets a date. Funding also can't rescue an agreement whose price clause is years out of date: a current valuation comes before any policy or note is chosen.

How long does buy-sell agreement funding take from the first call?

Plan on a few weeks of gathering and comparing. Underwriting for new coverage adds more weeks before anything is signed, and the insurer sets that pace, so we order the steps around it.

At the first call, you decide whether the partner's exit date is firm or a wish. That single answer changes whether insurance is the main source or only a bridge.

Over the next few weeks you gather the agreement, the in-force policy statements, and the last two years of the company return and K-1s. Then you decide which triggers to fund now and which can wait.

In the written comparison, each option shows its cash need and tax line. You decide cross-purchase or redemption, the down payment and note length, and whether the old policy goes to the departing partner.

Last, the attorney drafts the amendment and new coverage goes through underwriting, which can take weeks. You sign once the coverage is in force, never before. Apollon Wealth Management also connects this work to business exit planning when a sale is on the horizon.