Death or disability can be devastating without a plan in place. Through the use of life and disability policies it all can be averted at an affordable price.
- Suck-session planning, to cease the sucking action created by the death or disability of a partner.
Instead of me lecturing you on what will happen without a plan.
STOP….. And ask yourself these questions…
- When your partner dies, who will do his/her work?
- Can you cover two jobs?
- Will you be able to continue to pay his/her spouse, your new partner, the same income the deceased was making?
- Will you have the money to buy the surviving family member out? What Price? Will they sell to you if you ask?
- Will they cooperate on major company decisions that require majority votes from shareholders? (you may only own 50% or less)
- Will the surviving spouse have money to pay any estate taxes due without selling their company shares?
- Will your bank lend you the money to buy him/her out in newly weakened state the business is in?
- Will the deceased partner’s spouse change from valued friend of the family into your worst legal nightmare?
– A funded buy/sell agreement for death and disability
- There are two major parts to this solution:
- The legal framework to get the job done and; 2. The funding mechanism
The legal framework to get the job done:
- The Buy/Sell Agreement:
The legal document requires each of the partner’s estates to sell its share in the company to the remaining partners in the event death or an extended disability.
– It requires the remaining partners to buy the shares at a predetermined or formula price or; may provide for an independent appraisal.
Without this document, the family of the deceased partner may refuse to sell the shares or demand a higher value than it is worth.
They could hamstring the company by fighting business decisions and actions the surviving partner deems necessary. They may insist on being employed by the company without the skills to function and may retard the functioning of the company in a serious way.
Funding the buy/sell purchase:
The fact is, there really is no better solution to funding disability and death than insurance.
AGAIN. Ask yourself these questions:
Do you want to set aside large amounts of cash to pay for the shares of a deceased or disabled partner?
– If so, do you want to do that with personal funds or company funds?
Will you be able to accumulate cash fast enough to cover today’s value and any increases in the future caused by growth?
Do you think you can borrow money to buy the deceased partner out?
How will you pay the payments?
Will the bank lend the company money in its then weakened state?
Will you have the confidence that without your partner the company will succeed well enough to pay your salary, the new partner’s or employee’s salary and cover the additional loan costs?
Will you have money to survive the transition to a new partner or employee?
How long will that take?
Now, ask yourself the same questions in the event of disability
The insurance product solution:
-The answer to all this is to use life insurance and disability insurance.
-Term life insurance is the simplest way to insure partners for death.
-Some more advanced succession planning concepts justify the use of permanent policies but are beyond the scope of this blog.
- If you choose to use any kind of cash value life insurance, please note that a subsequent transfer of the policy to anyone other than the insured could cause most of the life insurance proceeds to be taxed at distribution.
– This is called the transfer-for-value rule under the Internal Revenue Code.
- There are four forms of disability insurance used in succession panning.
– Disability buyout insurance polices pay a lump sum in the event a partner being disabled for a year or more.
-Business overhead disability insurance pays temporary help a salary and covers the operational cost of keeping a company’s bills paid while the owner is disabled.
-This works for sole proprietors as well.
-Regular income replacement disability insurance pays the disabled partner an income to live.
-Using a disability premium waiver on all business life insurance policies to keep the premium up and funded. Great way to replace existing term life insurance.