There is a solution for any type of estate planning situation, but the average layperson would not know about most of them. This is one of the reasons why it is important to develop a relationship with an estate planning attorney. Here at our firm, we have the ability to help you devise the ideal strategy, even if the situation is somewhat unusual.
With the above in mind, let’s look at the matter of succession planning for small business partners.
The best way to explain is through the utilization of an example. Let’s say that you are an equal partner in a small business. You and the other co-owner have been very successful building it over the years, so the value of the business is considerable.
When you are planning your estate, will how do you handle the value of your share in the business? Technically, you could leave it to family members, but they may have no interest.
Plus, if you pass away first and your family sells your share, the remaining partner would be forced to deal with the outcome of the sale.
Of course, the same situation would apply to you if your business partner was to predecease you.
This type of business succession situation is typically addressed through the execution of a legal document called a buy-sell agreement. Given this scenario, the buy-sell agreement called the cross purchase plan would typically be used.
These agreements revolve around the utilization of life insurance. Getting back to our example, to execute this strategy, you and your partner would determine the overall value of each share in the business. You would take out life insurance policies on one another equal to this amount.
After the passing of one partner, the proceeds would be used to buy the share in the business that was owned by the deceased partner. This would give the surviving partner complete control going forward, and the family would have liquidity that could be spread around among multiple heirs.
There is another type of buy-sell agreement called the redemption plan. The basic idea is the same regarding the use of life insurance to compensate the decedent’s family. A major difference is the fact that the business entity itself would purchase the insurance policies.
As you can see, this can be the ideal estate planning solution, but these business succession agreements can also be executed to allow partners to walk away from the business if they choose to do so. This can be because of retirement or for some other reason.
Since we are looking at closely held businesses and life insurance, we should touch upon the matter of balancing inheritances. Let’s alter the example above to assume that you have always been the sole owner of the business, and your son started to help run it full-time after college.
His passion for the work is equal to yours, and it becomes apparent that he has no interest in working anywhere else. You have watched his dedication over the years, and you definitely want to leave the business to him when you are devising your estate plan.
In addition to your son that is intimately involved in the business, you have a daughter as well. She pursued an entirely different career path, and she respects the family business, but she has embraced another profession.
The business is by far your most valuable monetary asset. How do you leave it to your son without being unfair to your daughter? This is a good question, and life insurance is the answer.
You can take out an insurance policy on your own life that is equal to the value of the business that your son will inherit. Your daughter would be the beneficiary, and when the time comes, the inheritances that your children receive would be balanced.
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We are here to help if you would like to discuss small business succession planning or any other estate planning topic with one of our attorneys. You can call us right now at 513-721-1513 to set up a consultation appointment, and we have a contact form on this website you can use if you would prefer to send us a message.