Maintaining partial ownership of a business throughout your retirement years can be a very smart way to keep a viable income stream flowing throughout your life. And in addition to this, when you have played a part in running a successful business your expertise is truly priceless and of enormous value to your partners even if you reach the point where you aren’t engaged on a full-time basis. But when your are planning your estate you need to account for your share in the business with the best interests of your partner or partners in mind.
This type of small business succession is usually facilitated by what is called a buy-sell agreement. We would like to look at the two most common buy-sell strategies that involve the purchase of life insurance. The first is the cross-purchase plan, and to use this approach each partner purchases a life insurance policy on every other. The total value of the policies is set to match the agreed upon purchase price of an ownership share. When one of the co-owners passes away, the remaining partners use the insurance benefits to buy the share that was owned by the deceased from his or her heirs.
The other buy-sell succession strategy that we would like to highlight is the equity plan. To employ this method the business itself purchases insurance policies on each of the co-owners in an amount that is equal to the agreed upon value of an ownership share. Should one of the co-owners pass away, the proceeds from the policy are then used to purchase the share that was held by the deceased from his or her estate.
Buy-sell agreements are a win-win situation for all concerned. The remaining partners in the business retain complete control, and the family of the deceased benefits from the instant liquidity that is facilitated by the exchange.