One of the reasons why it is a good idea to work with an estate planning attorney when you are planning for the future is because of the fact that every situation is unique. There is no one way to go about it, and estate planning attorneys are cognizant of all of the different financial instruments, vehicles of asset transfer, and contractual strategies that exist.
With this in mind, partners in small businesses are faced with specific challenges that others are not. Many people who are partners in small businesses would say that their financial stake in the business represents their largest single asset. But, if you are a small business partner and you were to pass away and leave your share to your family members, how would they then proceed?
You would be leaving partners behind who are still actively engaged in the business. If your family was to sell their inherited share in the business to whoever comes along your partners would be forced to deal with this individual or entity whether they were comfortable with the arrangement or not. By the same token, if one of your partners died you may find yourself in the same uncomfortable position.
Fortunately there is a commonly utilized strategy that addresses the challenges stated above in the form of buy-sell agreements. There are two such agreements that are most commonly entered into. One of them is called the cross purchase plan, and it works by each partner in the business taking out an insurance policy on every other. Should one of the partners pass away, the combined insurance policy proceeds are used to buy that share from the estate of the deceased. The other most commonly used type of buy-sell agreement is the entity plan. With this plan the business itself takes out insurance policies on all of the co-owners, and when one of them dies the benefits from that policy are used to purchase the share that was owned by the deceased partner from his or her family.
This is a very brief overview of how buy-sell agreements work and what they are intended to accomplish. To gain a more detailed understanding, simply arrange for an initial consultation with an estate planning attorney who has a background handling small business succession cases.