A buy-sell agreement can be an essential part to the successful transition of a farm operation.

The purpose of a buy-sell agreement is to set the rules for transitioning ownership of the farm operation in the event of an owner’s death, disability, divorce, voluntary leaving or involuntary leaving. The benefit of using a buy-sell agreement is the owners negotiate the terms of the transfer prior to the event. Knowing the terms and conditions of the transfer beforehand enhances the stability of the operation.

Funding the purchase of a deceased owner’s interest is an important part of a buy-sell agreement. In many cases, the continuity of the business depends on the surviving owners’ ability to purchase the deceased owner’s interest. How this purchase is made and financed can be a particularly difficult question to answer.

In some cases, it may work for the purchase to be made on a promissory note. In this scenario, the surviving owners would purchase the deceased owner’s interest by making periodic payments to the deceased owner’s spouse, children or other designated beneficiaries. The purchased interest is used to secure the note. The buy-sell agreement will set forth the process for determining the purchase price, the term of the note and the interest rate.

Some issues to think of when using a promissory note are:

To avoid these issues, a buy-sell agreement can use life insurance to fund the purchase. Life insurance can be used in a couple of ways:

Balzarini is an attorney at law with Miller Legal Strategic Planning Centers, P.A. Contact him at [email protected].