Estate planning can be somewhat confusing for small business partners. You may not be sure about how (and when) you want to exit the business. If you do have ideas, you may not know how to make your vision for the future become a reality.
Small business partnerships come in various different forms. The partners could be family members, or they could simply be business partners who are not related.
One of the concerns would be the matter of liquidity and inheritance balancing. Let’s assume that you are a partner in a small business, and your share in the business is one of your most valuable assets. You would like the value of your share to be spread among multiple heirs after you die.
How do you extract your share, and how do you turn it into liquidity?
There is also the matter of the fate of the surviving partners. How will the partners proceed after your passing? To turn the equation around, how will you proceed if one of your partners predeceases you?
Business continuation agreements called buy-sell agreements are often used by partners in small businesses. One type of buy-sell agreement is the cross purchase plan.
With this plan all of the business partners get together to determine the value of a share in the business. Once this has been agreed upon, the partners buy life insurance policies on one another. The combined value of the policies will equal the value of a share in the business partnership.
When one of the partners passes away, the surviving partners will collect the insurance proceeds. These proceeds will be used to purchase the share in the business that was owned by the deceased partner.
The surviving partners can go on running the business, and the estate of the decedent will have liquidity that can be distributed among multiple heirs.
There is another type of buy-sell agreement called the entity purchase or stock redemption plan. With this plan the partners don’t personally purchase life insurance policies. The business entity itself takes out life insurance policies on all of the shareholders.
From there, the same situation exists. When one of the co-owners passes away, the business uses the insurance proceeds to purchase the share that was owned by the decedent from his or her estate.
Business Succession Planning Consultation
It can be challenging to plan your estate as a partner in a small business. If you would like to discuss all of your options with a licensed estate planning attorney, we can help.
Our firm offers free consultations to people in the greater San Jose area. To request an appointment, send us a message through our contact page.