Buy-Sell Agreement Funding NZ (2026): What Happens to the Business if a Co-Owner Dies?

If a co-owner dies, their shares usually pass to their estate, not to you. Here is how a funded buy-sell agreement lets surviving owners buy the shares cleanly, plus the annual revaluation step most owners skip.

You and your business partner built something together. You each own half. Then one of you dies. The shares do not simply revert to the survivor, and they do not vanish. They pass to the deceased owner's estate, which usually means their spouse or children, people who may have no interest in running the business and every interest in being paid out.

This is the scenario most co-owned New Zealand businesses do not plan for, and it is one of the most likely to break the company. New Zealand has 617,330 enterprises as at February 2025, and the overwhelming majority are small, privately held firms where an owner's death can trigger a forced share sale.¹ This guide explains how a funded buy-sell agreement solves it, who should own the policies, and why the valuation has to be redone every single year.

TL;DR: how a buy-sell agreement and insurance work together

TL;DR: A buy-sell agreement legally obliges a deceased owner's estate to sell their shares and the survivors to buy them at an agreed price. Life and TPD insurance funds the buyout. You need both: if a business grows from $1.2m to $2.4m, $600,000 of stale cover funds only a quarter of the bill.

What happens to a co-owner's shares if they die or are disabled?

Under New Zealand company law, shares are property. When a shareholder dies, their shares form part of their estate and pass according to their will (or the intestacy rules if there is no will). Unless your constitution or a separate agreement says otherwise, the surviving owners have no automatic right to buy those shares, and the estate has no obligation to sell them.

That leaves the survivors with three bad options:

• Work alongside the deceased's family. The grieving spouse becomes your new 50% business partner, often with no industry experience and an urgent need for income.
• Buy the shares with money you do not have. Suddenly you need to find hundreds of thousands of dollars, fast, while the business is already wobbling from losing a key person.
• Sell or wind up the business. The estate forces a sale because that is the only way to release the value the family is legally entitled to.

Total and permanent disability (TPD) creates the same problem without a death. A co-owner who has a stroke at 52 may never return, but still owns half the company and still needs to be bought out. At February 2025, 74% of New Zealand enterprises had no employees,² so in most co-owned businesses the shares are held by a handful of working owners with no ready buyer if one of them stops.

Why insurance alone (or an agreement alone) does not work

This is a common mistake. Owners buy life cover "on each other" and assume the job is done. It is not.

Insurance with no agreement gives the surviving owners a lump sum, but nothing legally compels the estate to sell the shares, and nothing compels the survivors to spend the money on the buyout. The family can take the view that they would rather keep the shares and the income they throw off. You now have cash and a co-owner you did not choose.

An agreement with no funding is worse in a different way. The contract obliges you to buy the shares at the agreed value, but you have no money to do it. The obligation is real; the cash is not. You either default on a binding contract or you mortgage the house.

The two only work as a pair. The agreement creates the obligation and fixes the price; the insurance delivers the cash on the day it is needed. One without the other leaves a gap.

Who should own the policy, and how does the company pay?

There are three common structures, and the right one depends on the number of owners, the tax position, and how comfortable everyone is with cross-ownership.

The figure below shows a common cross-option arrangement.

The tax piece you must get right

Tax treatment depends on what the cover is actually for, and the two are often confused.

• Capital-purpose cover (the buyout of shares) behaves like personal life cover. The lump sum used to buy out a shareholder is generally not taxable income, and the premiums on that capital-purpose cover are generally not deductible. GST does not apply to life insurance premiums, which are an exempt financial service.⁴
• Key-person (revenue-purpose) cover is different. Inland Revenue's position in QB 17/06 is that premiums for genuine key-person insurance are deductible under s DA 1, and any payout is taxable only to the extent it replaces taxable business profits; a capital component of a claim is capital.³

This is exactly why shareholder protection and key person insurance are structured as separate policies, not one combined "business cover." Mixing the purposes is how owners end up with a deductible premium and a taxable payout on money they needed tax-free. Get the structure documented with your accountant before the first premium is paid.

How do you value the shares, and how often should you revalue?

The agreement is only as good as the price it locks in. There are three common valuation methods:

In practice the best agreements combine an agreed value (or formula) reviewed annually, with an independent valuation as a fallback. The annual revaluation is the step almost everyone skips, and it is the one that quietly breaks the plan.

Why the annual revaluation matters

If the business was worth $1.2m when you set the cover and it is worth $2.4m three years later, your $600,000 of cover on a 50% stake now funds only a quarter of the buyout. The estate is legally owed $1.2m; the survivor has $600,000. The gap comes out of the survivor's pocket or the company's borrowing.

Cover set once can lag the business value significantly within a few years as the company grows and the number is never updated. An annual revaluation against the latest accounts, with the cover re-rated to match, closes that gap.

To check where your own cover sits against the share value, our insurance needs calculator gives a quick first estimate before a formal review. The valuation review and a KiwiSaver and managed-funds review for the owners personally often happen in the same annual meeting, because the same accounts drive both.

Death-only vs death-plus-disability cover: what to include

Death is the obvious trigger. Disability is the one owners forget. A working owner is at least as likely to be taken out of the company by a serious illness or injury before age 65 as by death, so disability should be treated as a core trigger rather than an optional extra.

Without TPD, a co-owner who is permanently disabled keeps their shares and their entitlement to dividends and a say in the company, while contributing nothing because they physically cannot. That is often more damaging than a death, because there is no estate forcing a clean resolution. Death plus TPD is usually the right choice so both triggers are funded. Some owners also layer trauma cover so a major illness that does not yet meet the TPD definition still releases funds, which sits alongside broader business continuity insurance.

Coordinating your adviser, lawyer and accountant

A buy-sell plan that works needs three people in the room, each doing the part only they can:

• Your lawyer drafts the buy-sell agreement (often a cross-option deed), the put-and-call options, and any constitution changes. This is the legal obligation to buy and sell.
• Your accountant sets the valuation method, confirms the tax treatment of premiums and payouts, and aligns the structure with the company accounts.
• Your adviser sizes the cover to the share value, places the right policies with the right ownership, and reviews it every year.

The classic failure is each professional doing their bit in isolation. The lawyer drafts the agreement; the cover is never put in place. Or the cover is bought; the agreement is never signed. An independent adviser can place cover across the major NZ insurers, such as Partners Life, AIA and Fidelity Life, and the right fit varies because their TPD and trauma definitions, occupation classes and pricing differ. The adviser's role in this triangle is to make sure the funding matches the legal obligation, in dollars and in structure. Full detail sits on our shareholder protection page.

Your shareholder protection checklist

01. Confirm what your constitution and any existing agreement actually say about shares on death or disability. Most default to "passes to the estate."

02. Get a current valuation of the business and each owner's stake, from your accountant.

03. Sign a buy-sell agreement drafted by your lawyer that obliges the estate to sell and the owners to buy, at the agreed value or formula.

04. Fund it with life and TPD cover sized to each owner's stake, with the right ownership structure (cross-option, company, or trust).

05. Document the tax treatment of premiums and payouts with your accountant before the first premium is paid.

06. Revalue and re-rate every year. Diarise it. A buy-sell plan set once and forgotten can leave a large funding gap.

Why review cover and valuation every year

Shareholder protection is an easy plan to set and forget. The agreement gets signed, everyone feels organised, and then the business grows over several years while the cover sits frozen at the old number.

An annual review keeps it current: re-value the business, re-rate the policies, and check the agreement still matches the people who own the company today, not those who signed it years ago. That is the difference between a clean transfer and a family dispute over a business nobody can afford to buy.

Frequently asked questions

What is a buy-sell agreement in NZ? It is a legally binding contract between the owners of a business that sets out what happens to a co-owner's shares if they die or become permanently disabled. It typically obliges the deceased or disabled owner's estate to sell their shares, and the surviving owners to buy them, at a value agreed in advance. It is usually paired with life and TPD insurance that provides the cash to complete the purchase.

Is the insurance payout for a buy-sell agreement taxable in NZ? Where the cover is capital-purpose (funding the buyout of shares), the lump sum is generally not taxable income and the premiums are generally not deductible. Key-person cover that replaces taxable business profits is treated differently under Inland Revenue's QB 17/06: premiums can be deductible and the payout taxable to that extent.³⁴ Always document the purpose with your accountant.

Who should own the buy-sell insurance policies? There are three common structures: cross-ownership (each owner insures the others), company-owned (the entity owns the policies), and trust-owned. Cross-ownership suits two or three owners and keeps the payout as personal capital. Company-owned tends to suit four or more owners. The right answer depends on owner numbers and the tax position, which is why the structure is set jointly by your adviser, lawyer and accountant.

How often should we revalue the shares? At least annually. Business values move, and cover set against an old figure leaves a funding gap exactly when it matters. A good review revalues against the latest accounts and re-rates the cover each year. A fixed dollar figure written in years ago is a common reason a buy-sell plan fails to fully fund the buyout.

Should our buy-sell cover include disability, not just death? In most cases, yes. A permanently disabled co-owner still owns their shares but can no longer contribute, and unlike a death there is no estate forcing a clean resolution. Death-plus-TPD cover funds a buyout on either trigger. Death-only cover is the exception, used mainly where TPD is uninsurable or the cost is prohibitive.

We are co-owners with no plan in place. Where do we start? Start with a current valuation and a look at what your constitution actually says about shares on death. Then book a review to map the cover and the agreement together, and coordinate with your lawyer and accountant so the funding matches the legal obligation. Book a free review to get the process moving.

General information, not personalised financial advice. Seek advice tailored to your situation before acting. Craig Smith Business Services Ltd (FSP712931), trading as Smiths Financial, holds a Class 2 licence issued by the Financial Markets Authority and is a member of the Financial Dispute Resolution Service (FDRS). Written by Henry Smith, Financial Adviser; reviewed by Craig Smith, Principal Adviser. Last reviewed 16 June 2026.