Succession Planning with Life Insurance

Posted on Sun, Jan 24, 2016

TakingCareofTomorrow_3.jpgSuccession planning may not be on the top of “To Do” your list.  Most of us would rather do almost anything else than think about the death of our business partners or even ourselves.   We’re here to give you information about some choices you have to solve this issue with Life Insurance. 

WHAT IS BUY-SELL PLANNING?

At the heart of a good business succession strategy is the planning that provides for the efficient passing of the business should the owner or one of the owners, die, become disabled, or wish to, or have to, leave the business for another reason. Buy-Sell Planning is one component of business planning and should be viewed within the context of long term business and succession planning. A Buy-Sell Agreement is the centerpiece of any Buy-Sell Planning.

WHAT IS A BUY-SELL AGREEMENT?

A Buy-Sell Agreement is a legally binding document that spells out what will happen to a business when a specific triggering event occurs, such as the death or disability of a business owner or shareholder. Other events typically covered include the resignation, retirement or termination of a shareholder or owner.

WHAT ARE THE BENEFITS OF A BUY-SELL AGREEMENT?

The major benefit of a Buy-Sell Agreement is that it allows for the continuation of the business by providing for an agreed upon transition of the business. In addition to providing a ready market for the business, it can provide that the price for both buyer and seller is a fair one. The agreed upon price can, in many instances, set the value of the business for estate planning purposes.

WHAT IS MEANT BY A “FUNDED” BUY-SELL AGREEMENT?

While the Buy-Sell Agreement can provide the legal framework for the sale and transition of a business, it does not provide the cash needed to fund it. One of the most popular methods of funding a Buy-Sell Agreement is permanent life insurance. Based on current federal tax law, permanent life insurance has several tax advantages. The death benefit will be received tax-free, in most instances, and the cash value in the policy grows tax-deferred. The cash value provides a pool of money that can be accessed with tax efficiency to fund a buy-out. Other methods of funding a Buy-Sell include: term insurance, borrowed funds, a sinking fund, or an installment purchase.

HOW ARE BUY-SELL AGREEMENTS FUNDED WITH LIFE INSURANCE STRUCTURED?

The majority of Buy-Sell Agreements funded with life insurance are either Entity or Cross Purchase Agreements. Other methods include Trusteed Cross Purchase and Wait and See Agreements.  For information that clearly explains the choices listed above, click here for a downloadable file.

Dean & Draper

Jerry_Linville.jpgWe hope you have found our information about Succession Planning useful.  Our expert on all things involving Life Insurance, Jerry Linnville, welcomes your questions and calls  281-794-3783.

Dean& Draper is a Trusted Choice insurance agency representing over 200 insurance companies. For over 35 years we have offered a trusted freedom of choice to our clients.  ContactUs.

The recommendation(s), advice and contents of this material are provided for informational purposes only and do not purport to address every possible legal obligation, hazard, code violation, loss potential or exception to good practice. Dean & Draper Insurance Agency specifically disclaims any warranty or representation that acceptance of any recommendations or advice contained herein will make any premises, property or operation safe or in compliance with any law or regulation. Under no circumstances should this material or your acceptance of any recommendations or advice contained herein be construed as establishing the existence or availability of any insurance coverage with Dean & Draper Insurance Agency. By providing this information to you, Dean & Draper Insurance Agency does not assume (and specifically disclaims) any duty, undertaking or responsibility to you.  The decision to accept or implement any recommendation(s) or advice contained in this material must be made by you.

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Topics: Life Insurance, Succession Planning, Buy Sell Agreements