When you are involved in a business partnership and you are planning your estate, you have to consider the matter of succession. Your share in the business may well be one of your most significant assets. But when you pass on, how is your share carved out and passed along to your heirs without negatively impacting your partners and the viability of the business? This may sound rather challenging, there is a rather simple and elegant solution available in the form of the buy-sell agreement.
These agreements can be used to facilitate succession due to retirement, disability, or a voluntary exit for any reason, but they can also be used in estate planning. If you are the co-owner of a small business, when you pass away you will invariably bequeath your share to your heirs. What can they logically do with it? One or more of your family members could possibly assume your ownership role, or they could sell your share to the higher bidder.
These possibilities are usually not going to resonate well with the surviving partners, and depending on the circumstances, your family would probably prefer not to have to try to find a buyer or attempt to fill your shoes as a co-owner. The way that a buy-sell agreement can satisfy both parties is through the purchase of life insurance. Each partner in the business takes out a policy on the life of every other. Should you pass away, the policy proceeds are used to buy your share from your heirs. This is called a cross-purchase plan, and the other most common buy-sell mechanism is the entity plan. To implement this approach, the business entity itself purchases life insurance on each of the co-owners, and when one of them passes away the proceeds are used to buy the deceased partner’s share from his or her family.