Partners in small businesses face some specific challenges when they are making plans for the future. If you were to simply leave your share of the business to your family after you pass away questions may arise.
No one in the family may have the skills or the inclination to serve your role in the business. And if there were, how do you spread the value of the business out among all of your family members? In addition, what if your partner or partners does not feel comfortable working with the member of your family who wants to fill your shoes?
One very common way that these situations are handled is through the creation of buy-sell agreements. The two types of buy-sell agreements that are most frequently used are the cross-purchase plan and the entity plan. With the cross-purchase plan each partner takes out an insurance policy on every other. When one of the co-owners dies, the combined insurance policy proceeds are used to buy the share of the deceased owner from his or her family. This share is then absorbed by the remaining partner or partners.
The entity plan works the same way, with insurance proceeds being used to purchase the ownership share of the deceased partner from his or her heirs. The difference is that the business as an entity purchases the insurance rather than each individual co-owner taking out the policies.
If you would like to learn more about buy-sell agreements or business succession planning, arrange for a consultation with an estate planning attorney.