Those who are partners in small businesses need to consider the matter of succession, and this is something that can appear to be a bit complicated at first glance. Because the partners in the business will be directly impacted by the death of one another the matter of succession is something that must be discussed between them, and this is a twist that is not usually a part of the estate planning process.
Though your stake in the business may be quite valuable, those who would inherit your share may not want to be involved in the ongoing operation of the business. At the same time, the remaining partners may not to comfortable working with an heir of yours who wanted to assume your role. In fairness it is very possible that you will feel the same way.
Small business partnership succession planning is often facilitated by the creation of buy-sell agreements which involve the purchase of insurance policies on the co-owners. The two types of buy-sell agreements we will look at here are the entity plan and the cross purchase plan.
To implement the entity plan the business purchases insurance policies on each of the co-owners that are intended to equal the value of each individual’s share in the enterprise. Should one of the partners pass away the insurance benefits are used to purchase this person’s interest in the business from his or her family according to a prearranged agreement that all parties would have entered into in advance.
The way that the cross purchase plan works is that each partner buys an insurance policy on every other equal to the amount of an ownership share in the business. Upon the death of one of the co-owners the remaining partners pool their insurance policy proceeds and use them to buy out the deceased partner’s share in the business from his or her estate.
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