Estate Planning for the Business Owner
If the business owner doesn’t want her spouse to have control over inherited assets, or if she simply wants to ensure that the spouse can’t leave the inherited assets to a new spouse should he remarry after the business owner’s death, the business owner can establish a marital trust to receive the spouse’s share of the estate. The business owner would name some trusted individual or institution to serve as a trustee of this trust, often with the spouse as a co-trustee. The spouse would receive income for life, and principal too, if needed. Upon the surviving spouse’s death, the trust terms mandate that the trust assets pass to the owner’s children, thereby eliminating the ability of the spouse to give those assets to a new spouse should he remarry.
Buy-Sell Agreements
A buy-sell agreement is a contractual arrangement providing for the mandatory purchase (or right of first refusal) of a shareholder’s interest, either by 1) other shareholders (in a cross-purchase agreement); 2) the business itself (in a redemption agreement); or 3) some combination of the other shareholders and the business (in the case of a hybrid agreement)
upon the occurrence of certain events described in the agreement (the so-called “triggering events”). The most important of the triggering events is the death of a shareholder, but others include the disability, divorce, retirement, withdrawal, or termination of employment or bankruptcy of a shareholder.
A buy-sell agreement’s primary objective is to provide for the stability and continuity of the family business in a time of transition through the use of ownership transfer restrictions. Typically, such
agreements prohibit the transfer to unwanted third parties by setting forth how, and to whom, shares of a family business may be transferred. The agreement also usually provides a mechanism for determining the sale price for the shares and how the purchase will be funded.
Life Insurance
Family business owners are often good candidates for life insurance, which can provide instant liquidity at the business owner’s death to pay estate taxes, provide for children who aren’t active in the business, fund the buy-sell agreement, and provide for a spouse from a second marriage.
Although life insurance proceeds aren’t income taxable to the beneficiary, such proceeds are typically taxable in the insured’s estate. That’s why it’s so important for the insurance to be owned by an irrevocable life insurance trust (ILIT) in which the proceeds won’t be subject to
estate tax because they aren’t considered owned by the business owner’s estate. ILITs can be structured to own single life insurance policies that pay out on the death of the business owner or second to-die life insurance policies, which pay out on the death of the survivor of the business owner and her spouse, which is typically when estate taxes are due.