As a family business owner, you may have concerns when you are devising your estate plan. For example, there is the matter of inheritance balancing.
The best way to describe inheritance balancing would be by way of example. Let’s say that you have a daughter who has always helped you run your business, and you have a son who embarked on a different career path. You are going to give your daughter the business, and it is one of your most valuable assets.
Your daughter will continue to run the business after you are gone, but you want your son to receive an inheritance of equal value. To satisfy this objective, you could balance the inheritances through the purchase of life insurance.
You could make your son the beneficiary of a life insurance policy that will provide a payout that is equal to the value of the business. As a result, each of your children would receive inheritances of equal value.
Succession Planning for Business Partners
If you are a partner in a small business, estate planning can seem a bit complex, because you may want to spread the value of your share of the business among multiple different heirs. People often address this type of situation through the utilization of a legal device called a buy-sell agreement.
Cross Purchase Plan
One type of buy-sell agreement that is often utilized is called the cross purchase plan. Using another example, let’s say that you are one of three partners in the business. If you leave your share to your family in your estate plan, your surviving partners would be forced to deal with the outcome. You would be in the same position if one of your partners was to predecease you, and this can be disconcerting.
You could all gain autonomy and no loss of control if the partners were to enter into a buy-sell agreement. To implement this strategy, the partners would get together to determine the value of a business share. Each of the partners would subsequently take out a life insurance policy on every other, with the value of the proceeds equaling the value of a share in the business.
After the death of one partner, the surviving partners would collect the proceeds from the insurance policies. The money would be used to buy the share of the business that was owned by the deceased partner from his or her family. Going forward, the family would have liquidity that could be distributed among multiple different family members in accordance with the wishes of the decedent.
Meanwhile, the surviving partners could go on running the business as usual.
Entity Purchase Plan
There is another type of buy-sell agreement called the entity purchase plan. This type of plan is sometimes called a stock redemption plan. Everything is the same with regard to life insurance policies, but the difference is that the business entity itself would take out the policies.
Schedule a Business Planning Consultation!
If you are a parent that is the owner of a business, or if you are a partner in a small business, you should carefully plan your estate in a fully informed manner. Things can get complicated under these circumstances, but there are estate planning solutions that can be implemented that would lead to the realization of your estate planning goals.
Personalized planning is the key to a well-constructed estate plan. Every situation is unique, so your plan should be carefully crafted to ideally suit your needs.
Our firm can help if you are ready to take action. We offer free consultations, and we would be glad to help you put a plan in place. To set up an appointment, send us a message through our contact page or call us at 585-374-5210.
Michael Robinson, Estate Planning Attorney
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