Small business owners face certain estate planning challenges, and this can be particularly true when there is a partnership. What would take place if one business partner was to pass away?
There is a business succession solution that is often utilized when this type of scenario exists. Let’s look at the details.
Let’s explain by way of example. Suppose you are one of three small business partners. Your business is thriving, and the share that is owned by each respective partner is quite valuable. The share that you own is actually your most significant monetary asset, and you would like its value to be spread among multiple different heirs after you pass away.
How could you make this vision a reality? If you simply allow your family to sell your share after you die, your partners would be placed in a helpless situation. They would have no say over the new partner’s identity. You would be in the same position if you were a surviving partner, so everyone would be on equal footing.
Under these circumstances, you could use a buy-sell agreement as an estate planning solution. If you use the cross purchase plan, each partner would take out a life insurance policy on the others. The value of the combined policies would be calculated to equal the value of a business share.
After one partner passes away, the two surviving partners would receive their insurance policy payouts. These proceeds would be combined to purchase the share of the business that was owned by the deceased partner.
The remaining partners could then go forward as usual, and there would be liquidity that could be distributed among the heirs.
There is another type of buy-sell agreement called the entity purchase or stock redemption plan. Everything is more or less the same with regard to the utilization of life insurance to provide liquidity, but the difference is that the business entity would purchase the life insurance policies on the lives of the partners.
A buy-sell agreement can potentially be a good choice if you are a partner in a small business, but you would do well to discuss all the details with one of our estate planning attorneys so that you have a full understanding of the strategy.
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