In this post, we are going to look at a couple of different concerns that may be a factor when you are engaged in your business planning efforts. First, we will look at business planning for people who are partners in small businesses.
Let’s say that you are one of three partners in a small business. The business is very successful, and the share that is owned by each partner is quite valuable. In fact, your share in the business is your most valuable asset, and you want its value to be spread among multiple different family members after you pass away.
How do you make this happen? If you simply allow your family to sell your share after your passing, your partners would be forced to deal with the outcome whether they liked it or not. You would be in the same position if you were a surviving partner, and it is not a very comfortable one.
You could use a buy sell agreement under these circumstances. With the buy sell agreement called the cross purchase plan, each partner would take out a life insurance policy on every other. The combined value of the policies would equal the value of a share in the business.
After the passing of one partner, the other two partners would receive their insurance policy proceeds. These proceeds would be combined to purchase the share of the business that was owned by the deceased partner.
The partners could go forward with continuity, and the family would have liquidity to spread among multiple heirs.
There is another type of buy sell agreement called the entity purchase or stock redemption plan. This type of buy sell agreement is very similar to the cross purchase plan, but the primary difference is that the business entity itself takes out the life insurance policies.
A buy sell agreement can provide a very good solution for you if you are involved in a small business partnership, but you should speak with an estate planning attorney to explore all of your options.
Your attorney will gain an understanding of your personal situation, answer all of your questions, and make the appropriate recommendations. You can ultimately exit the interaction with a solid estate plan in place that appropriately provides for all of your loved ones as you simultaneously protect the interests of your business partners.
Asset Protection
When you are putting a financial plan together as a business owner, you should consider the matter of asset protection. There are those who look for targets in this litigious society, and you have to be vigilant if you want to make sure that your assets are protected.
While anyone can be sued, people who are involved in certain businesses are particularly exposed to litigation. For example, consider the plight of a landlord. Tenants could potentially get injured on rented property, and this would be an ongoing risk.
Physicians are also quite vulnerable to legal actions. They are viewed as deep pocket targets by litigious types, and they are inherently exposed to malpractice suits.
A family limited partnership can provide an asset protection solution. If you establish the partnership, you are the general partner. You could name people in your family as limited partners. The general partner is the only partner that can make decisions on behalf of the partnership, so you would completely control the decision-making process.
If you were to convey a business that you own into the family limited partnership, it would no longer be in your direct personal possession. As a result, if you are a landlord, and you convey an apartment building into the partnership, your personal assets could not be targeted if someone was injured in that apartment building.
To take things a step further, let’s say that you are a landlord who owns five different apartment buildings. You could place each different apartment building in a separate family limited partnership, and you would be limiting your exposure to legal actions.
If someone in the partnership was to be the target of a legal action, the assets in the partnership could not be attached, and this is another asset protection benefit that you gain when you create a family limited partnership.
A family limited partnership can be of great value if you are a business owner who is looking for asset protection solutions. However, in addition to the asset protection angle, family limited partnerships are often utilized by people who are exposed to the federal estate tax.
Assets can be transferred among partnership members at a tax discount, and you could potentially use the annual gift tax exclusion to provide family members with shares in the partnership tax-free.
A limited liability company is another asset protection structure that can be used to separate your personal property from the actions of your business.
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Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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