You don’t care because you’re dead, right? OK. What if you had to stick around in the rafters and watch and listen to what happens if you didn’t plan for this event.
Is your family going to realize a gain from all the years you put in building the business? Is your partner going to be in a position to pay your family for your fair portion of the business? Is one of your family members going to have to go to work in the business in order to get any more money out of it? Are all of those people who trusted you enough to loan your business money going to be out of luck? Is there going to be a smooth business succession because you planned for this possibility?
So many business people don’t ever make a plan and get the life insurance in force to fund the plan because they believe it will all be too complicated…and expensive. A legal buy/sell agreement between partners fully funded with life insurance equal to value of each partner’s portion is the way to handle it. If you die your partner is paid life insurance proceeds equal to your share of the business. He or she then turns around and uses that money to buy your family’s part of the business.
Understand that your family inherits your half of a partnership in your business. If they aren’t bought out they have every legal right to take over your place in the business, work there, get paid and continue to earn your share of the business profits. This might be fine, but 99% of the time it is the other partner’s worst nightmare. So, what’s better, paying for a legal agreement to be drawn up and buying life insurance or having someone in the business that you may not even like or who may not even have a clue what to do?
Well, first let’s address the complicated part of the equation. The only complicated part is valuing the business and your accountant should be able to do that or get it done for a relatively low cost. Or you can skip that and just agree on an amount that reflects the value of each share of the business. That has the drawback of possibly not satisfying the life insurance company guidelines for financial justification. There are ways around that I won’t go into here because the insurance companies I write for don’t want to hear it.
The other issue is the cost of the insurance. What if one of the partners is a who’s who of health issues and insurance is very expensive? We’ve all heard that over 50 life insurance becomes very high priced. The premium is not tax deductible (unless you want the death benefit to be income taxable), so that doesn’t help. If I had a partner in that situation I think I would just come to an agreement that whatever the business can afford, whether that’s $250,000 or $1,000,000, will be the basis of value of the share. I recently had a client who had $1.5 million of life insurance in force and his portion of the business went up in value to $2 million. We applied for another $500,000 but due to a serious heart condition he was declined. The partners agreed that the value of their half of the business would be worth $1.5. Common sense has to be along for the ride. He passed away last year and his family was grateful that they had done all the could and accepted the $1.5 million as a full buy out.
Bottom line. The death of a self employed person shouldn’t be a financial mudslide for the family. It’s easy and it really, compared to the alternative of doing nothing, is extremely fair and cheap.
If you have any questions or need any help making sense of your business situation, I am an independent life insurance agent licensed in all the states and DC. If you call you will be dealing directly with me and I would be glad to help you put together the solution to your business challenge. Toll free 866-539-7914.