Sudden Death Buy-Sell
In real estate investment transactions, sometimes there is more than one person involved. Some deals may need to have partners. An example is if one of the people in the deal provides the investment money and another is responsible for all the construction, renovation, or rehabilitation of the property. Partnerships make sense for some particular deals.
Legal Company Structure
A partnership in a real estate transaction is achievable using the company legal structure of a partnership or using the structure of a limited liability company. In some cases, partners may have different liability and operational responsibility. The partner or partners with the operational responsibility is a “general” partner. A person who has their liability limited to the amount of money they invest in a project is a “limited” partner. Limited partners do not necessarily help with the day-to-day operations.
A limited liability company is a special type of partnership, which limits the liabilities of all the partners to the amount they invested in the transaction.
Sudden Death Buy-Sell
The sudden death buy-sell is a part of the legal operating agreement of the partnership or the limited liability company (LLC). This part of the agreement covers what happens to an ownership interest in a partnership or LLC, should one of the partners die or become legally incapacitated.
A typical sudden death buy-sell clause contains these elements:
• The procedures when a partner suddenly dies or becomes legally incapacitated.
• How the business will be valued.
• The rights of the remaining partner(s) to buy that portion of the business owned by the estate or trustee(s) of a partner who died or became legally incapacitated.
• The conditions under which that portion can be sold to third parties.
• The steps needed for transfer of ownership.
Importance of the Sudden Death Buy-Sell Agreement
This agreement is made at the onset of the business to provide contingencies for things that might happen in the future. It should be reviewed annually. Sometimes there is key person insurance, where the partnership is the beneficiary of life insurance proceeds if a partner dies.
When a partner dies or becomes incapacitated, this can wreak havoc on the business operations if a sudden death buy-sell agreement is not in place. Disputes may arise with the family of the deceased or those who benefit from the inheritance. Legal actions can force the sale of the business. A forced sale typically does not maximize the value to the owners.
Summary
If anyone enters into a partnership agreement for a real estate transaction or becomes a member of a limited liability company, having a comprehensive sudden death buy-sell agreement is imperative. This avoids disruption of the business should something unfortunate suddenly happen to one or more of the partners.
It makes sense to keep the business operating, make the ownership transition go smoothly, and preserve the value of the operations until a structured payout for the ownership interest is made or the business can be sold for a good price.