What happens to a business partnership when one partner dies? Your business can fall apart if the proper planning and agreements aren’t in place before tragedy happens. Learn how you can protect your business and avoid losing all that you have achieved.
After you've asked yourself these questions, you can begin to create or revisit a legally binding contract that spells out exactly what you and your partner(s) would want to happen if any of you were to die. This document can be as simple or complex as needed and can provide for virtually any contingency.
A properly arranged and funded agreement is a legally binding contract that spells out exactly what is to happen if one of the business’s owners dies. It generally calls for the survivors to buy the deceased owner's share in the business from his or her heirs. It should spell out the actual purchase price or provide an objective formula for determining the price.
With this option, the surviving owner(s) use cash at the death of a co-owner to fund the buy-sell agreement. But there are several drawbacks:
With this option, the surviving owner(s) borrow funds, usually from a bank, at the death of a co-owner to fund the buy-sell agreement. This, too, has drawbacks:
Purchasing insurance can be a cost-effective funding option for a buy-sell agreement. Typically, a policy is taken out on the life of each owner so that when one owner dies, the surviving partners now have money to buy out the family of the deceased partner. Using insurance as a funding vehicle will provide the following benefits:
Whatever option works best for you, it helps to gather all the facts before you make a decision. Your legal and tax advisors, along with qualified insurance professionals, can help you create an arrangement that best fits your needs.
This material is for informational purposes only. Neither New York Life nor its agents provide tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.