Proper succession planning helps prevent a difficult situation that often arises when a business partner passes and the remaining partners need liquidity to buy the deceased partner’s ownership interests. In many instances, the deceased owners family (usually a spouse) inherits the partnership and becomes the new partner. Often times this is not the desire of the partners, deceased owner or family member.
When a death occurs, most businesses do not have the liquidity available to offer a fair market value or agreed price for the remaining business interests. Most succession planning strategies utilize life insurance as a financial tool to provide this liquidity.
Life insurance purchased on each partner and held by the other partners is used to fund a Cross Purchase Buy-Sell Agreement. Upon death, the policy proceeds or cash value is used to purchase the deceased partner’s shares at a pre-determined and agreed price.