A small business estate plan is critically important, yet often overlooked
Little thought is given to the possibility of the death or disability of a partner or key employee at the start of a business. Future prospects can quickly diminish in the wake of an unexpected loss.
A well- written business agreement, effective financial planning, and strategic insurance coverage can mean survival after the loss of a partner or a key employee. Advice from attorneys, accountants, financial advisers, and insurance professionals, including whether or not to operate as a corporation, a limited liability company, or a partnership, is often the most important step to building long-term security and financial success.
A vivid example of why business estate planning should be done is what can happen when a member of a partnership passes away-the death of a partner automatically dissolves the partnership. Survivors do not have the right to buy the interest of a deceased partner, nor can they simply assume the good will or take over the assets without consent of the deceased’s estate, or a court. The surviving partners become the liquidating trustees they must convert all assets of the partnership into cash at the best price they can get, as well as make an accounting to and divide the proceeds with the deceased partner’s estate. They must close or re-organize under a new business structure.
Survivors may maintain possession of the firm’s property, but have no right to carry on the business. Without a transition plan, the company’s assets could be liquidated. This results in a final settlement that is based on “auction block” values. Losses can be worse if family members, who rely on wages from the business, lose their jobs. The value of any “good will” can quickly diminish, and competitors may make an effort to exploit the loss of a key player.
Re-organizing the business is possible through a partnership with the heirs of the deceased. The capability of any new partner, however, along with his or her potential contribution to the business, must be considered. Buying out the interest of the heirs is possible, but coming to a fair price and terms after a partner’s death can be as difficult as working out financing for the deal. The same could happen in a sale to the deceased partner’s heirs. The selling party may have to accept a note secured by the business assets, which is not always a good deal.
Reorganization can be arranged before any partner’s death through a “binding buy and sell” agreement. The agreement’s terms should be funded with life insurance proceeds, which can fund the purchase price, or at least a down payment. This situation would allow the business to go on with minimum interruption. Partners may apply for, own, and be the beneficiary of life insurance on other partners, as may the partnership, as an entity, as related to each partner. Special coverage for the loss of a key employee can help with associated costs, lost income, and fund the recruitment of a replacement.
When a team of professional planners- attorneys, accountants, financial advisers, and insurance professionals-is involved at the start of a new business, they will ensure that the business has a solid foundation. Take the time to build an estate plan, and you will assure that you receive the full benefits of being a partner in a business. It will be one of the most important long-term moves you’ll ever make.
Darrell Wayne has more than 40 years of professional experience assisting people with insurance and financial matters.