Buy Sell Agreements (Key Man Insurance)
Business considerations
Estate planning is even more important when a business is involved, because a business partner’s death can have serious consequences for the business, its surviving partners and employees.
If the deceased partner’s family has no other significant means of financial support, they may need to rush through a sale of their share of the business. This could disadvantage the family by forcing them to accept a low price, as well as denying existing partners the opportunity to keep control. In the middle of all this uncertainty, the business itself could really suffer.
A common practice when two or more partners own a business is to have a buy-sell agreement backed by a life insurance policy.
If a partner passes or seriously injures themselves, the surviving partner(s) are entitled to buy the deceased partner’s share of the business. The funds for the buyout are provided by a life insurance policy.
This arrangement has a number of benefits. The deceased partner’s family receives a fair value for their share of the business, while the remaining partners get certainty in the ownership of the business.