How Life Insurance Can Help Ensure Family Business Stability
As you grow your family business, you envision it lasting for generations. However, that takes more than just a vision. It takes planning. As we also discuss in our article, Building a Family Business Legacy with Continuation Planning, important components to that plan are life insurance and a buy-sell agreement, which you can use to help secure your business as it transitions from one generation to the next.
In a partnership, upon the death of a family business owner, that owner’s interest in the business passes to the decedent’s estate. So now what happens? Without a life insurance policy and a buy-sell agreement, the estate may need or wish to liquidate those ownership shares. That likelihood is compounded by the fact that family businesses are often rather illiquid, making it difficult for the business to purchase back those shares. Furthermore, the estate beneficiaries may have other priorities or careers that make taking over the partial ownership of the family business an unattractive proposition.
However, with a proper buy-sell agreement and life insurance policy in place, your family business can avoid this problem. Partners should work with an attorney to establish an agreement in which the family business agrees to buy the shares of the departing owner for a set price. An insurance policy is secured to provide that purchase price, with the partner as the beneficiary. Each partner is the owner of an insurance policy on the other partner.
This kind of agreement helps provide the funds the surviving partner will need to purchase the decedent’s ownership shares and continue the business without having to liquidate other business assets. For more on using buy-sell agreements and life insurance to help ensure business continuation, see our article, Building a Family Business Legacy with Continuation Planning.
Contributing Sources: http://businessinsure.about.com/od/lifeanddisability/qt/lifeinskeyemp.htm; http://www.peterkatt.com/newsletters/ATI_v12n09.html; http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2011/Wealth/Closely_Held_Businesses.jsp