Business Succession & Buy-Sell Agreements

Dec 27, 2010

For most people the process of estate planning is aided by some clear-cut landmarks. You generally know in advance when you are going to retire and at that point your career has ended and you are usually not going to have any further responsibilities to the company that had employed you. Your retirement will have been anticipated and it is very likely that you played a part in grooming your successor while you were still receiving a paycheck. Exactly how the company reacts to your departure is not a matter that you have to concern yourself with in most cases.

However, when you are the co-owner of a small business you have to have a succession plan in place. When the co-owner of a small business passes away his or heirs are going to find themselves in possession of that share. It is very likely that they would want to liquidate it, especially if its value was intended to be spread among multiple family members. The remaining co-owners of the business would typically feel uncomfortable with the estate of the deceased selling that share to the highest bidder. The way that any conflicts are circumvented is through the execution of a buy-sell agreement.

The way that the buy-sell agreement is used for estate planning purposes involves life insurance. There are two primary ways that this small business succession strategy is actualized. One of them is called the cross-purchase plan, and the way that it works is that each partner takes out an insurance policy on the life of the other partners. When one of them passes away, the proceeds from the policies are used to buy the ownership share of the deceased from his or her estate.

The equity plan is the other very common buy-sell mechanism. With this approach the business entity itself purchases a life insurance policy on each co-owner, and upon the death of one of them the benefits are used to buy the share that is in inherited by the heirs of the deceased at a previously agreed upon price.

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