Estate planning for small business owners is a bit more intricate than it is for other folks, but owning a share in a business can actually simplify your overall planning in some important ways. It may seem like an exercise in overstating the obvious, but having a source of fresh, ongoing income throughout your retirement years is a very good thing. When you have to plan ahead to stretch your retirement savings through the next twenty-five years or so it can be quite challenging. When your business is providing you with income throughout that time you have a bit less pressure to contend with in terms of squeezing earnings out of your accumulated assets.
This is well and good but you do have to have a succession plan in place, and this is often achieved through the execution of a buy-sell agreement. Upon your death there are going to be two primary interested parties with regard to your co-ownership of the business: your partners, and your heirs. Your partners are generally going to want to retain control, and if they were to bring anyone else in they would want to make the decision among themselves. So they are usually not going to want your heirs to be able to sell your share to the highest bidder. You of course would feel the same way if one of your partners was to predecease you.
With a buy sell-agreement the partners get together and valuate their respective ownership shares. They then draw up a contract that gives the remaining co-owners the right to purchase the share of a departing partner at an agreed upon price based on their share valuation. As this applies to estate planning, buy-sell agreements will often use life insurance policies to fund the purchase of a deceased co-owner’s share. With the cross-purchase plan each co-owner takes out a policy on every other and the proceeds are used to buy the deceased partner’s share from his or her heirs. With the entity plan the business entity itself purchases a life insurance policy on each co-owner and these proceeds would be used to buy the ownership share of the deceased from his or her estate.
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- Leaving Assets Can Be Tricky – Part 3 - August 13, 2020