How Life Insurance Can Save Your Business

 

Most people don’t start a business thinking about how it will end, but you should. Without a clear path of transfer or an exit plan, you could be leaving your employees and the business in limbo. Depending on the type of entity, there are various tax and legal implications if an owner passes away or divorces without preparing the entity. You or your partners, could now be forced into business with people you don’t know, or worse, don’t like.
 
So how can you prevent befalling this fate? Well one of the most important things you can do is draft a buy-sell agreement (BSA). A BSA can assist in the transfer of ownership interests and determine how involuntarily acquired shares/assets can be sold back to the company. Most BSAs are set up using Life Insurance to provide the funds needed for buy outs and buys backs upon the death or disability of an owner.  
 
For example, Tom, a 56 year old man owns a law firm with his partner John, 62. John suffers a heart attack and passes away, leaving his portion of the business to Sally, his wife of 40 years. Sally unfortunately is not an attorney and can provide no day to day value to the business and is not legally permitted to assist with caseloads as she is not licensed. Now Tom is in business with Sally, mourning his partner, and feeling overwhelmed by it all. Well, had Tom and John set up a BSA, the life insurance purchased by the firm on each of the owners would have provided the funds via the death benefit, to buy back Sally’s inherited ownership. This would give Tom full ownership and the ability to continue the business as is, or offer ownership stakes to a trusted and vetted new partner. It also allows Sally a cash buyout for John's final expenses and supplemental income without having to worry about whether partial payouts from the business can support her for the remainder of her life.
 
Did the example above resonated with you? Are you ready to put the proper controls/exit plan in place for your business? Then call us today to find out how we can help you establish a BSA for your organization funded by life insurance.

Life happens, let us help you be prepared.

Image from Kierman Law 2021

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