Wait-and-See Buy-Sell Arrangement

The wait-and-see buy-sell arrangement is a hybrid buy-sell arrangement that combines elements of the traditional entity purchase and the cross-purchase buy-sell arrangements. Unlike those two arrangements, the specific purchaser of an owner’s business interest under a wait-and-see arrangement remains uncertain until death, retirement, or disability actually happens. This provides the business owner with flexibility as to the transfer of ownership when the triggering event occurs.

The wait-and-see buy-sell arrangement provides that the business entity has the first right to purchase the ownership interest in question after the triggering event, then the remaining owners have the right to purchase, and if any ownership interests remain, then the business entity must purchase the remaining ownership interests.

How the Wait-and-See Buy-Sell Arrangement Works

Let’s assume that we have three shareholders: Tom, Steve, and Mary. In the typical wait-and-see buy-sell arrangement this would be the situation at Tom’s death:

Option 1

The business would have a first option to buy Tom’s stock from his estate.

Option 2

Should the business fail to exercise this option or exercise it only with respect to a portion of Tom’s stock, then Steve and Mary would have a second option to buy his stock (or the remainder of it).

Option 3

If Steve and Mary should leave any of Tom’s stock unpurchased, then the business, as the third option, must purchase any remaining portion (or all) of his stock.

The wait-and-see buy-sell works well because it assures Tom's family that all of the stock will be purchased. At the same time, surviving shareholders are assured that they will succeed in having full control of the business. However, buying the shares of another shareholder can be a costly endeavor. Often, businesses and business owners look to life insurance to fund the arrangement.

Using Life Insurance to Fund the Arrangement

In order to fund the arrangement with life insurance, the business entity and each of the individual owners are potential life insurance buyers. The entity has the greatest exposure since it has a binding obligation to purchase the interest if the first two options are unexercised, or incompletely exercised. It is essential to establish the life insurance ownership in the proper manner at the outset. For this purpose, either the cross-purchase approach or the stock redemption approach may be used. However, more often the wait-and-see buy-sell is funded under the cross-purchase structure. This is because it is generally more tax efficient to move the insurance proceeds from the surviving shareholder(s) to the business (if the entity option was elected) than to move the proceeds from the business to the surviving shareholder(s) (if the surviving shareholder option was elected).

The wait-and-see buy-sell arrangement may not be appropriate in all circumstances. This approach is obviously not appropriate for a sole proprietorship or a single-owner corporation. Further, if the owners are related, the family attribution rules are a potential problem in the event of a redemption under the ﬁrst option, or a mandatory purchase under the third step.

Wait-and-see buy-sell — During Lifetime