Last week, we began a discussion about business buy/sell agreements and succession planning. Well, planning for your business or professional practice is an important part of your estate planning. For many, their business is their largest asset and only source of income. What should you do?
What if someone is the business? They might be a consultant, or run a successful business out of their home, do they need a buy sell?
They still need a succession plan. If they die suddenly, what happens to the business? Will their family receive anything from the years of work they did? What about their obligations to their clients or customers? Consider:
Let’s look at the basic insurance buyout in the event of death. How does that typically work for a closely held business? What’s the difference between a redemption and cross purchase?
A cross purchase works like this: Partner A buys an insurance policy on Partner B and vice versa. Whoever dies first, the surviving partner will receive the life insurance proceeds and be obligated by the buy/sell contract to buy the deceased partner’s shares. This is advantageous because the buying partner gets tax basis for the payment made so that if he or she later sells the capital gains cost will be much lower. A redemption is when the entity buys back the stock.
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