Estate Planning Considerations for Family Business Owners
Family business owners should take extra care to ensure that their interests are protected. Most business owners’ shares represent a large part of their estate’s value. However, few take the time to lock in valuable estate planning benefits that come in the form of a buy-sell agreement.
A buy-sell agreement can help protect an owner’s business interest by ensuring they do not lose control of their ventures and protect their heirs by restricting shareholders, partners, or members of a business from unilaterally transferring an ownership interest to anyone outside the group. Further, since the death of a co-owner could have a disastrous effect on the finances of a business, life insurance policies covering the lives of co-owners generally form the financial backbone of any buy-sell agreement. A buy-sell agreement that is not covered by life insurance death benefits should specify that a buyout should be made under a multi-year installment payment arrangement, which provides remaining co-owners with the flexibility to fund the buyout.
Without a buy-sell agreement, the result on the deceased co-owner’s estate could be drastic. First, there may be no market for the remaining business ownership interest left by the deceased co-owner—the proceeds of which might be necessary to pay estate taxes. Second, heirs of the deceased co-owner will be left to work with the IRS to value the deceased’s share of the business for estate tax purposes, an expensive and time-consuming affair. With a buy-sell agreement, however, a business ownership interest can be sold under pre-approved financial terms and the price set also establishes the (realistic) value of the business ownership interest for estate tax purposes.
If not drafted carefully, the IRS can disregard the buy-sell agreement. To ensure that your buy-sell agreement will withstand IRS scrutiny, please contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information on these types of transactions. Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results. While this post may include legal issues, it is not legal advice. Use of this site does not create an attorney-client relationship.