Planning for death or disability isn’t on the top of anyone’s To Do List. In fact, a whole lot of people get caught in a difficult situation just because they don’t like to think about the eventuality much less plan for it. When the owner of the business is either disabled or dies, liquidating the business may be the only viable alternative.
A couple of circumstances that could make the liquidation of the business the single viable action are:
- If the success of the business is completely dependent on the personal skill and experience of the owner.
- There is no successor management in the form of a capable family member, a co-owner, a key employee interested in purchasing the business or an outside buyer.
When liquidation of the business at an owner's death or disability is the only viable alternative, the primary objective should be to plan in advance for an orderly liquidation that results in the greatest possible value for the disabled owner or surviving family. While a properly-drafted will can give an executor the authority and flexibility to manage a planned liquidation, there must be sufficient liquidity in the deceased owner's estate to provide the time needed for a planned liquidation.
Life insurance can provide the funds that make the difference between a planned liquidation and a financially-disastrous forced liquidation. Consider the uses to which life insurance can be put in the planned liquidation of a business:
Estate Settlement
Life insurance proceeds can be used to pay estate taxes and other estate settlement costs, allowing the liquidation to proceed on an orderly basis.
Family Income
Using life insurance proceeds to provide the surviving family with a continuing income can avoid a forced liquidation of business assets for this purpose.
Working Capital
If the executor needs additional cash to temporarily operate the business, life insurance can serve as the source of that cash.
Offset Shrinkage
Even a planned liquidation will usually result in some shrinkage in value, as compared to what the business was worth as a going concern. Life insurance can be used to replace the value lost in the liquidation.
For "pennies on the dollar," life insurance provides the cash needed to avoid a forced liquidation will be available exactly when needed -- at the business owner's death.
At Dean & Draper, we want to partner with you in planning for situations just like this one. We welcome the opportunity to talk with you about your needs, situation, and preferences. As your trusted advisor, we will provide options and solid advice. For additional information on life insurance, click here.
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