Many business owners are masterful technicians in their field of expertise. In their angst and excitement to get their business launched they fail to look down the road. Why? There are many reasons but it’s extremely important to plan the business divorce before the wedding.
What would happen if you could not run your business? What if your partner suddenly perished? How would the business operate? Who would fill the voids? Do they have the expertise to do what you or your partners do? How would the assets be split and passed to the heirs of the deceased partner?
Preparing for such an occurrence is called succession planning…when a business will be transferred from one to another. It’s important that the proper funding for a succession be established upfront. Insurance is a great way to achieve that with minimal out of pocket expense. Whether the peril is disability or death, insurance can protect the key people in an organization and therefore ensure that the funds are available to keep the business moving forward in the event of a catastrophe.
These funds can be used to buy out a partner’s shares via a buy-sell agreement. The remaining partner(s) will then be able to maintain control of the business and keep it moving forward. Without this insurance it’s possible that the business would have to be sold to pay the deceased partners estate or the remaining partner(s) would have to buy out his ownership with personal funds or loans. This can spell disaster for the business.
This is why it’s important to plan the business divorce before the wedding. Sound business, financial and estate planning can eliminate setbacks before they occur.
In addition to the business planning benefits, whole life insurance can offer your business a highly liquid source of cash and tax advantaged growth for the partner(s). The cash values can be used like a business line of credit. Borrow what is needed, pay back the loan with interest and achieve a tax deduction for the business and an individual gain.
In the future we will explore additional examples of business, estate, financial & retirement planning using life insurance and other inurance products.
If you have a specific question or topic that you would like me to address please contact me!
Scott Storace
Tags: cash value, life insurance, liquidity, tax benefits, whole life
Hi Scott,
How would a S-Corp achieve a tax deduction using this strategy to purchase a car for example?
Perhaps a future post could explain this?