Many people drag their feet when it comes to estate planning, because they do not know where to start. They recognize the need for a plan, but they have questions, and the matter seems complicated. This can be true for anyone, but it is especially true for small business partners.
If you are a partner in a small business, you may face a somewhat difficult estate planning scenario. What would happen to your share of the business after you pass away, and how do you see to it that the liquidity is spread among your surviving family members?
This is just one question, but the next question would be this: Where would liquidation of your share leave the surviving partners? A buyer could come along, and the intentions of the buyer may not be consistent with the wishes of the surviving partners.
Without question, this is a tricky situation. However, there is an estate planning solution that is often implemented called a buy-sell agreement.
Insurance policy proceeds are at the core of the strategy. One commonly used buy-sell agreement is called the cross purchase plan. With this plan, the business partners convene to determine the value of each business share. Once this has been determined, the partners take out life insurance policies on one another. The value of the policies are calculated to equal the value of a business share.
After the death of one partner, the other partners collect the proceeds from the insurance policies. The proceeds are used to purchase the deceased partner’s share from his or her family. The surviving partners own that share, and the business can proceed as usual. The family of the deceased partner then has liquidity that can be spread among multiple family members.
There is another form of buy-sell agreement called the entity purchase or stock redemption plan. With this plan, things work the same way with regard to life insurance policy proceeds being used to buy a business share that was owned by a deceased partner. However, the business entity itself purchases the insurance policies.
A buy-sell agreement can be a good estate planning solution for many business partners, and you may want to consider this option when you are engaged in your estate planning efforts.
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Every business owner should have an exit strategy. The ideal course of action will vary depending upon the intentions of the owner or owners and the unique set of circumstances that exist.
It is likely that you have estate planning questions if you are a small business owner, and this is understandable. Our firm offers free consultations, and we would be more than glad to answer these questions and help you put a plan in place.
To set up an appointment, send us a message through our contact page: Hartford CT Estate Planning Attorneys.