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It can take years for you to build your business, risking everything every day. Your business can be your greatest accomplishment and you have worked hard to make it what it is today. You feel you are the business and the business is you; your self- worth is tied up in that business. The last thing you want is to see it all lost if something happens to you. Family Business Succession Planning can help ensure your business continues in the case of potential risks including:
If you are waiting until your death to transfer your business to the next generation, you will need some way of paying for the transaction whether there is estate tax or not. Failure to plan may result in the liquidation of the business in order to pay estate taxes and expenses. If an estate representative is forced to liquidate the business in order to pay estate taxes nine months after the date of death, the price they can obtain will be dramatically impacted not only by the speed with which the business must be liquidated but also because no planning was done to create a market for the business. The sale of the business becomes a fire sale which reflects in the price that can be obtained.
Proper life insurance planning can alleviate the need to sell the business and if the business is to be sold, a market can be created and a fair price obtained. If there is estate tax, life insurance can be used to pay the taxes and related expenses. Typically, an irrevocable life insurance trust is used to hold the policy and keep the death benefit out of the owner’s estate. That way the beneficiaries can receive the proceeds estate and income tax free.
If there is not an estate tax, there are still estate expenses for lawyers and accountants, burial expenses, and loss of revenue due to the owner no longer being a part of the company.
There may be issues with suppliers, creditors, and customers without the key owner in place. Insurance can be a way to calm these various groups so they know the company has the funds to sustain a drop in revenue while the owner is replaced with a family member or key executive.
It may be hard to imagine ever losing a business you worked hard to create, but the fact is someday someone else will own your business. A properly designed Buy-Sell Agreement and estate plan ensures your business passes as you wish. Even though your intent may be to simply leave the business to family members, care should be taken to ensure that non-participating family members who do not work in the business do not receive stock in the company but instead receive other property or a buyout. A Buy-Sell Agreement can help alleviate family disputes that may arise while trying to readjust the business after something has happened to you. With the proper plan in place, the family will have the guidance they need during this critical transition period.
A stock redemption buy-sell where insurance is owned by the company allows the company to buy stock from the estate while a cross purchase buy-sell would have the children working in the business owning the insurance, and the children in the business purchasing the stock from the estate or from the children not in the business. A cross purchase buy-sell is more expensive as the cost of insurance must be grossed up for the income taxes the children must pay but the advantage is the children in the business receive a step-up in basis on their stock. The stock redemption plan has the insurance owned by the company and once the company purchases the deceased owner’s stock the stock is retired and becomes Treasury stock. The remaining owners then own all of the outstanding stock in the company with no step-up in basis.
As mentioned under the Buy-Sell Agreement there may be times when family members that have not been involved in the business receive partial ownership of the business. When there are multiple family members with different levels of involvement in the business, it is often times difficult to determine how the assets of the family business should be divided. Life insurance can help ensure that once the owner dies, the business will have the cash flow to continue as planned. The proceeds of the life insurance can be used to purchase the non-involved family member’s interest in the business, so that the family members that have been involved in the business can continue to run the family business as planned.

So many family businesses have non-family members in very key roles without whom the business may suffer. It could be the key salesman who has all of the customer contacts, the individual who has all of the relationships with suppliers, the key financial person in the company or the individual who keeps all of the machinery running out in the shop. If that person dies suddenly, the business will suffer a financial hardship due to that employee’s absence. A key person policy can help to ensure any loss is covered and additional funds are available to hire consultants temporarily until a new employee can be found and trained. It can also include a component that can provide a benefit to the deceased employee’s family.
Normally, on a life insurance policy that does not generate significant cash value, we would not recommend it be used for NQDC. However, the Signature Guaranteed Universal Life Insurance Policy offers the Cash-Out Rider. This allows the company to provide the employee’s family guaranteed death benefit protection at lower prices than the typical universal life policy while retaining the Cash-Out option which can pay a partial return of premiums after 15 years and a full return of premiums after 20 and 25 years, subject to the death benefit cap1. That way, the employee’s family is provided death benefit protection and then, if it is not needed after 20 or 25 years, the company may surrender the policy for its Cash-out value and use that to provide the employee an additional cash bonus.
Family Business Succession Planning is very different than planning for a closely held business that is
not family held. Each family is different and has a different set of “family” issues to plan for. The one commonality is that liquidity will be needed to convey the family business to the next generation while ensuring the continuation of the family business and being fair to children who do not participate in the business. Signature Guaranteed UL can provide a low cost means of providing permanent insurance coverage that will be there when it is needed. If the business is sold, the insured can utilize the Cash-Out option during the 15th, 20th, and 25th policy years to obtain the return of premiums while having enjoyed the permanent protection of insurance for all of those years.

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