The ideal estate plan will depend upon the circumstances, and this is one of the reasons why it is important to discuss your options with a licensed attorney. Some situations are more challenging than others, but there is an effective strategy to address just about any scenario.
With this in mind, we will look at a couple of different ways that life insurance can provide solutions for small business people.
If you are planning your estate as a partner in a small business, succession is a major issue. After a partner dies, how will the succession be handled? The partner’s heir would inherit the share, but how would the business be conducted going forward?
To account for this, you and your partner could enter into a buy-sell agreement called a cross purchase plan. First, you would decide on the value of an ownership share in the business. Each partner would take out a life insurance policy on the other that is equal to that amount.
After the death of a partner, the survivor uses the proceeds from the policy to purchase the deceased partner’s share from the estate. This type of arrangement can also be used when there are more than two partners.
Another common type of buy-sell agreement is the entity purchase or stock redemption plan, and it is very similar. The major difference is that the business as an entity would purchase the life insurance on each partner.
Life insurance can provide a solution to another estate planning challenge. The best way to explain is through a simple example.
Let’s say that you are the owner of a restaurant that has been firmly established for decades. The property itself is very valuable, and the business is a huge money maker.
You have a son and a daughter, and your son started working at the restaurant full-time after graduating from college. He has helped the business grow, and he is committed to running the operation after you pass away.
Your daughter took a different career path. She does not have any interest in the business at all. The business is your most valuable possession by far, and you do not want to divide it in any way. At the same time, you do not want to shortchange your daughter when you are planning your estate.
Under these circumstances, you can determine the value of the business and take out a life insurance policy that is equal to that amount. You can make your daughter the beneficiary, and after you are gone, she would receive the proceeds.
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