Many people who are partners in a small business would say that their financial stake in the business is their biggest single asset. The unique thing about small business ownership is that in many cases the specific skill set, experience and passion of the co-owners is something that is virtually impossible to duplicate. So when small business owners are planning for the future they can’t just plan on a family member assuming their role in the business when they pass away.
And at the same time, even if someone in your family did want to succeed you your partners may not feel comfortable with this arrangement. Of course you may feel the same way if you were a surviving partner. In addition to this, if your family was to sell your share to the highest bidder after your died your partners would be stuck with this individual or entity whether they liked it or not. And once again this could apply to you if you outlive your partner or partners.
The way that these small business partnership succession planning issues are usually resolved is through the creation of buy-sell agreements that involve the purchase of life insurance. The two most widely used types of buy-sell agreements are the entity plan and the cross purchase plan.
With the entity plan the business itself takes out life insurance policies on each of the co-owners. When one of them passes away, the proceeds from this policy are used to buy the share in the business that was owned by the deceased from his or her family under previously agreed-upon terms. The cross purchase plan involves each of the partners purchasing an insurance policy on every other. The combined insurance benefits are then used to buy the deceased’s share from his or her estate.
Buy-sell agreements are a relatively simple and efficient solution to a potentially difficult circumstance. If you would like more information about this strategy, the first step would be to get together with an experienced estate planning attorney who routinely handles small business succession planning.