Insurance Funded Succession Planning

A succession plan can lessen the devastating aftermath of a business partner’s death or disparity. One solution to many of the questions that arise after a partner dies (e.g., Who does your partner’s work after he/she dies? Will the surviving family member cooperate on major company decisions that require majority votes? Will the surviving family member be forced to sell company shares to pay estate taxes?) is to incorporate a funded buy/sell agreement for death and disability into the business succession plan. The agreement will require each partners’ estate to sell the partners’ company shares to the remaining partners in the event of death or disability. The remaining partners then buy the shares at a predetermined or formula price, or the agreement may provide for an independent appraisal of the shares.

One of the best ways to fund the buy/sell purchase is with insurance. A company can insure partners for death and disability with life and disability insurance. It is important for companies to keep in mind the so called transfer-for-value rule for cash value life insurance. There are three forms of disability insurance used in succession planning: (1) disability buyout policies pay a lump sum for a year or more in the event of a partner’s disability, (2) business overhead insurance helps cover operational costs and temporary salary, and (3) regular income replacement disability insurance pays the disabled partner an income to live off of.

See Ken Davis, Succession Planning for Businesses, Producer’s Web, Feb. 28, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.