Business Succession Planning

If you own a substantial interest in a closely-held business, a succession plan may be the single most important component of your retirement and estate plan. Without an effective business succession plan, your death or long-term disability could mean the end of the business you worked so hard to build.

Liquidations and forced sales usually don't protect your investment very well, so planning for the disposition of your business (through business succession planning or a buy-sell agreement) may be the most important and urgent of your business planning needs.

  • Would your business be able to continue if a partner should pass away or become totally disabled?
  • Are there funds available to buy the stock back from the deceased partner's heirs or disabled owner?
  • When the partner dies, can his or her family still be a part of the business that the partner helped to create?

These are just a few of the many questions that can be answered by giving some thought to a buy-sell (business-continuation) agreement.

Trust Services: Buy-Sell Agreement Funding

Business succession refers to transferring a business interest to other owners, family members, or key employees at the death or disability of an owner.

This is often accomplished by means of a buy-sell agreement between the parties. This agreement can be funded with life insurance and disability income insurance, and placed within a trust.

If the buy-sell agreement is properly structured, the agreement can determine the value of the business interest for estate-tax purposes.

Please consult your own legal or tax counsel for advice on specific legal and tax matters.

Life Insurance for Buy-Sell Agreements

Whether you pass the control of the business to a new generation or to a co-owner or key employee, an effective succession plan can help to ensure the smooth transfer of your business at retirement, death, or disability.

A well-crafted buy-sell agreement can help families and business associates retain control of a business and protect its value in the event of retirement, death, or disability.

With proper funding, a buy-sell agreement can help ensure there will be a ready market for the business at a time when you or your family may require a source of retirement income, estate liquidity or family income.

A buy-sell agreement can also help minimize conflicts that may occur and establish a value for the business for federal estate tax purposes.

The purpose of buy-sell agreements is to help protect, preserve, and pass on the control and value of a family-owned or closely-held business at the retirement, death or disability of an owner. The control and management of the business can be continued uninterrupted by the surviving owner(s), and a fair price can be paid to the stockholder or his/her family or estate for the value of his/her interest.

Life insurance is most often chosen to fund the two basic forms of agreements: stock-redemption (entity) plan and cross-purchase plan.

  • Stock-Redemption (Entity) Plan: Under a stock-redemption (entity) plan, the business owns life insurance on the owners and uses the proceeds to purchase (redeem) their interest at death.
  • Cross-Purchase Plan: Under a cross-purchase plan, the business owners own insurance on each other and buy the shares of the deceased owner.

Contact Lau & Lau Associates today to learn more about life insurance for buy-sell agreements

Disability Insurance for Buy-Sell Agreements

A buy-sell agreement contains provisions for the business to buy out the principal's share of the business in the event of a disability.

A solidly funded buy-sell agreement demonstrates the strength of your business to investors and creditors. At the same time, it also assures your employees and customers that your business is prepared to meet unexpected challenges.

The funds to complete the transaction can come from several sources — from the business, another buyer, or an insurance policy.

Funding the buy-sell agreement with insurancecan help you to avoid having your business' cash resources depleted by unfortunate circumstances. Designed to fund the disability portion of a formal buy-sell agreement, this solution can help provide funds for small business partnership buy-outs in the event of total disability. It also helps reduce the business disruption and financial burden of buying out the disabled partner and transitioning ownership.

Such policies have exclusions and limitations. For cost and complete details of coverage, please contact Lau & Lau Associates today.

The information contained herein is not written or intended as specific tax or legal advice, nor may it be relied on for purposes of avoiding any federal tax penalties. Neither Lau & Lau Associates, LLC nor its employees or representatives are authorized to give tax or legal advice. Individuals are encouraged to seek tax or legal advice from (an) independent tax and/or legal advisor(s).