23. Two equal partners in a business worth $100,000 enter into a Buy and Sell Agreement to assure continuation of the business in the event of the death of the other partner. Which of the following funding arrangements BEST meets their needs?
Answer: C
Each partner purchases a $50,000 policy on the other.
This option is the most effective funding arrangement as it ensures that each partner has sufficient coverage to buy out the deceased partner's share of the business, thereby maintaining continuity. A $50,000 policy on each partner provides the necessary funds to secure the $100,000 business value effectively.
A) The partnership purchases a $100,000 policy on each partner.
This option could lead to unnecessary excess coverage since each partner would have a policy that exceeds their ownership share. While it provides a large payout, it may not specifically address the need to fund the buyout agreement effectively, as the payout per partner exceeds the value they need to cover.
B) Both partners purchase $50,000 policies on themselves.
This option is inadequate because it does not provide funding for the buyout of the deceased partner's share. Each partner would only receive compensation for their own demise, leaving the surviving partner without the necessary funds to continue the business effectively.
C) Each partner purchases a $50,000 policy on the other.
This is the optimal arrangement as it allows each partner to have a policy that directly funds the buyout of the deceased partner's share. By having $50,000 in coverage on each other, they collectively ensure that the full value of the partnership can be covered without leaving any gaps.
D) Each partner purchases a $100,000 policy on the other.
While this option provides ample coverage, it is more than what is necessary for the buyout, leading to potential over-insurance. The extra funding might not be used effectively, as the business value to be purchased is only $100,000, not requiring each partner to have a full $100,000 policy on the other.
Conclusion
The best option is for each partner to purchase a $50,000 policy on the other, as it provides exactly the amount needed to facilitate the buyout of the deceased partner's share of the business. Other options either result in excess coverage or do not meet the funding needs adequately, thereby failing to ensure the continuity of the business.