Estate Plan, Buy/Sell Agreement & Insurance - Coordination is Key!

How do you plan to transfer your business to successors? Hopefully you have a plan in place and have taken the necessary steps to provide for a smooth transition of ownership and management for when you want to retire or just cut back. Maybe you have determined what you need from the business to satisfy your personal financial needs in retirement. Maybe you’ve built up significant personal wealth and can afford to gift all of the business to family successors. Or maybe you need to sell some or all of it.

It is important to plan for this voluntary transfer event, but it is equally important to put protective measures in place in case you become disabled or die before your planned transition. For premature death, the buy/sell agreement should require the company or other owners to buy out your ownership interest at death. Typically, this buy out is funded with life insurance.

The life insurance funding won’t do anyone any good if the proceeds don’t go to the buyer who has the obligation to buy your interest from your estate. For instance, if the buy/sell agreement calls for your partner to buy out your interest, your partner should own and be beneficiary on the insurance policy on your life. Our reviews of buy/sell insurance funding have found insurance policies owned by the company instead of the individuals or vice versa, cause unnecessary complications.

If you own multiple businesses with the same partners/shareholders, any one business entity may seem to have too small a value to worry about funding a buyout with insurance. Before deciding to self-fund a buyout of the smaller companies, determine how the businesses add up for a total buyout picture. Then you can make a more fully-informed decision on how much you and your partners can self-fund.

Playing out death scenarios may seem morbid, but doing so can shed valuable light on current funding levels. Say the plan is for Sam to buy or inherit Bill’s stock - is the subsequent buyout of Sam’s stock possible once he owns all those shares? If any life insurance needs to be realigned to fill any gaps, doing so should also be coordinated with your estate plan.

You should coordinate your estate plan with the provisions of the buy/sell agreement and insurance funding. Will all of your stock turn to cash at your death through a buyout, providing needed liquidity for your spouse and family and for the payment of estate taxes? Or will the buyout be over time as with an installment note, possibly creating an immediate liquidity problem? Will some of the stock pass into a trust at your death? If so, careful attention needs to be given to the trust provisions. If some of your stock will transfer by an installment sale, should the note continue over your spouse’s lifetime to provide cash flow? If the note is between family, should it be bequested back to the purchaser in order to essentially forgive it? Perhaps you want to include a provision in your will or revocable trust for your ownership interest in one or more businesses to pass to certain heirs. You need to make sure the buy/sell agreement allows for that.

Most areas of your personal finances are intertwined, and for small business owners, the picture is even more complex as business finances become part of the weave.

Care should be given to coordinating your entire financial life with particular attention given to this weave, the prominence of its business aspects, and your personal risks if unattended.. Don’t leave it to chance - take time to properly plan now.