New York Estate Planning & Elder Law Blog
Business continuity and financial planning go hand in hand when forming an estate to suit your needs during life, and in the interests of beneficiaries after death. Entrepreneurs and Founders who have formed a successful business have a stake in transfer of the assets to their estate or trust for future sale or distribution of proceeds. The second of a three (3) part series, the business continuity and share transfer planning process focuses on the importance of the buy-sell agreement and life insurance coverage to protect an estate holding business assets from risk.
Buy-Sell Agreements Protect Share Transfer
Many business owners consider a buy-sell agreement for transfer of business assets to an estate, which is a contractual agreement of “right of first refusal” or “mandatory purchase” of shareholder interest in the event of death or incapacity. A buy-sell agreement provides instructions for purchase of a decedent’s shares at a predetermined price.
A risk measure for financial planning, a buy-sell agreement establishes stability in case of business secession during transition from an original owner. Customarily, such agreements provide a price mechanism and stipulate how a purchase must be funded; and restrict transfer of ownership to any prohibited third parties. Buy-sell agreements also reduce capital gains owed by an estate.
The best option for ensuring a smooth transition to successors at time of an owner’s death or incapacity, a buy-sell agreement can be structured at time of business start-up. Founders benefit from capital gains exemption at time of retirement. If an owner retires or becomes incapacitated, a buy-sell agreement may provide much needed liquidity.
Life Insurance Coverage Protects an Estate
The security of structured financial planning is key for any business owner planning an estate. Life insurance coverage offers an added layer of protection for estate holders transferring shareholder assets as part of their estate plan.
A popular business solution for estate planning is life insurance. Life insurance owned by the estate holder or their business in the form of redemption agreement, or other shareholders in the form of a cross-purchase agreement, will guarantee a purchaser of an owner’s shares at time of their death. Authorization of purchase of those shares can proceed if the insurance premium has been paid.
Life insurance (i.e. universal life) rather term insurance is recommended for continued coverage after the age of sixty. Life insurance insurers generally do not allow for disbursement of fund while the insured estate holder is still alive. An insurance policy part of an irrevocable trust can be set up for the distribution of proceeds from an estate for tax purposes.
Contact a licensed estate planning attorney to find out about business secession and share transfer to an estate.
Estate Law Attorney Practice
Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule an estate planning consultation.