There are many tools in the estate planning toolkit, so there are various strategies that can be implemented depending on the circumstances. This is one of the reasons why it is important to discuss your situation and your options with an estate planning attorney. If you make assumptions without enough information, you may make mistakes that could have been avoided.
This can apply to people that are partners in small businesses. You may assume that you have no choice but to leave your share in the business to your family in your last will, even if it is problematic for your partner and to some extent, your loved ones. Fortunately, there is a widely embraced solution.
The best way to explain the succession value of a buy-sell agreement is to present a very simple hypothetical example. Let’s say that you and a coworker decide to strike out on your own when you are both relatively young. You start your own business, and over time, it starts to thrive.
After a couple of decades, it generates a great deal of revenue, and you and your partner own the real property and equipment outright. It is worth a lot of money, and your share is by far your most valuable possession. Your partner can say the same thing.
What you do when you decide to put an estate plan in place? A buy-sell agreement can simplify what would appear to be a complicated situation. With the cross purchase plan, you and your partner take out insurance policies with payouts that are equal to the value of a share in the business.
When one partner passes away, per the agreement that both people entered into, the insurance proceeds are used to buy the lead partner’s share from his or her family. In this manner, the surviving partner can conduct business as usual, and the family has liquidity to spread around multiple heirs.
There is another type of agreement that centers around the same concept, but the business itself as an entity takes out the insurance policies. It should be noted that transfers to the surviving partner partners would not be subject to regular income taxes, and this is a great benefit.
While we are on the topic of small business ownership, estate planning, and insurance, we should take a brief look at another scenario that is not uncommon. We will use the same example to assist with the explanation with a few changes.
Instead of going into partnership with a coworker to start your own business, you go it alone. Everything goes the same way with regard to the success of the enterprise and its status as your most valuable possession.
You have two children, a son and a daughter. Your daughter worked in the business with you while she was in high school, but your son was not interested. After college, your son began his career in his chosen field, and your daughter asked if she could help you run the family business.
She works hard and does everything you could possibly ask for and more. Her efforts definitely make the business even more profitable, and you would like to leave it to her when you pass away. Though he never shared the same passion for this particular line of work, you love your son just as much as you love your daughter.
What do you do to balance the inheritances that you will leave to each of your children? The answer is to take out a life insurance policy that is equal to the value of the business and make your son the beneficiary. After your passing, your daughter would be the sole owner, and your son would receive an inheritance of equal value.
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It can be quite an exciting and challenging adventure to go into business for yourself. As we all know the majority of start-ups do not succeed in the long run so you have to defy the odds to gain traction and become successful.
Because of the demands involved in starting up a business how you will be exit the business may not be the first thing on your mind. However, once you know that you are in fact going to be in it for the long haul you should ask yourself how you or your estate will proceed when it is time to retire or after you pass away.
The way you approach this is going to vary depending on the type of business you are in. Some businesses are owner driven, such as professional practices and they are not really viable after the exit of the owner. Other businesses will continue to operate after the owner steps away. Some plan on handing the business off to the next generation. Others intend to sell the business to finance their retirement years. Partners in small businesses have yet a different set of circumstances to address.
The best way to explore your options and ultimately devise an exit strategy is to sit down with an experienced Reno NV estate planning attorney. Your lawyer will gain an understanding of your unique situation, listen as you explain your objectives, and give you the appropriate advice.