The Top 6 Benefits of Life Insurance in a Family Business Succession Plan

Business owners who wish to leave their business to their families are required to decide when and where to transfer it. Based on the objectives and goals of the four parties involved in business succession planning, the tools and techniques that are used will differ depending on their respective roles. It is important that you understand how life insurance can play an important role in a typical family business succession plan.

1. Estate Liquidity

Many business owners wait until their death to pass all or most of their business interests on to their children. Life insurance is a good option for business owners who have a taxable estate. This will allow the beneficiaries of the business to receive the funds they need to pay estate taxes. Business owners who cannot liquidate their ownership interests can use life insurance to pay estate taxes. Life insurance may be required to pay estate taxes for the children of business owners. The insurance policy will usually be held by an irrevocable insurance trust, so the beneficiaries can receive both income and estate taxes-free.

2. Purchase-Sell Agreements

A well-designed buy-sell agreement ensures that the business interests of the deceased, disabled, or withdrawing owners are sold at a fair and market price. The agreement can also give the remaining or surviving owners control of the business and determine the value of the business interest to be used for estate tax purposes. The best way to raise the cash required to buy the interest of a deceased owner is to use life insurance. The cash surrender value of a life insurance policy is often tax-free and can be used to pay for the lifetime purchase of an owner's interest.Insurance Brokers also have to pay while taking insurance,Insurance Agents help you with making a capable choice of policies that will cover you or set you up for any occurrence that can be a money-related load for you.

3. Estate Equalization

Life insurance can be used by business owners to provide "equitable" treatment for their children. The inheritances can be divided by leaving the business to the children who are active and the life insurance to the children who are inactive. It also avoids the need to buy the interests of inactive children at a time that the business might not be able to. The insurance could be owned by an irrevocable trust for the benefit of inactive children depending on the facts and circumstances.

4. Key-Person Insurance

For the continued success of family businesses, many depend on employees outside the family. Many companies purchase "key-person" insurance to protect against financial loss or to guarantee that the business remains in the family.

5. Asset Protection Planning

Businesses that assume the risk of environmental contamination (e.g., waste hauling and landfills, chemicals, etc. Federal and state pollution laws can make them liable. This liability does not apply to the business, but the owners of the business may also be subject to such laws. The potential liability increases as the business pass on to the next generation. This is where life insurance comes in handy. An irrevocable trust can be established by the business owner to provide life insurance for the maximum amount of time allowed by state law. This includes at least 90 years in most cases and permanency in a few states. The trust would provide income and principal to the beneficiaries as required for their health, education, and support. The trust assets, which include state and federal environmental agencies, cannot be accessed by beneficiaries' creditors if it is properly structured.

6. Family Bank

It is best to only leave active children who have voting rights in the business when the decision is made to give the business away to inactive and active children. Additionally, it is important to enter into "put" or "call" agreements. A put option is usually a contract that allows the business to buy all or part of the interest of inactive children in the business at a fixed price and terms. A put option is a way for an inactive child not to be deprived of the opportunity to own the business interests. A call option, on the other hand, allows the active children or the business to purchase the business interests from the inactive children at a fixed price and terms. The absence of a call option may make it difficult for active children to avoid conflict between those who receive salaries and bonuses and those who do not. A "bank" is established to cover any calls and puts by allowing the active children to have life insurance on the senior member of their family. The policy will usually be held outside the business entity. This could include a trust for their benefit or a limited liability company that is owned by the active kids.

Succession planning is designed to assist business owners who are facing many challenges. There is no one-size-fits-all approach to keeping the family business family-owned. Each business is unique and requires specific tools and techniques. As a business grows, life insurance is crucial in helping it survive and thrive.