Family Business Planning

Family Business Planning: Uses life insurance as an excellent way to equalize the amount of assets distributed to your children.

You’ve worked hard over the years to build your business to its current level of strength and success. It’s important to make plans now to ensure safe passage of your business to your children.

When it comes to estate planning, most people say they want to treat their children equitably. It is important to keep in mind, however, that equitable does not always mean equal.

While there is no one right way to pass along your business, there is a wrong way. Leaving your business in equal shares to all of your children, when only some of them are active in the business, may disrupt family harmony, as well as business operations.

After all, the “active” children have probably invested a great deal of sweat equity into the business and have forgone other options with their lives to stick with the family business.

Meanwhile, the “inactive” children, despite the best of intentions, do not have the day-to-day knowledge of the business to successfully step into an ownership role.

Life insurance as a solution

An ideal solution may be to leave the business to your children who are active in the business and assets of equal value to your children who are not. This obvious solution sounds easy, but isn’t if your business is by far your most valuable asset. From a planning perspective, you should analyze your business assets separately from non-business assets. Experience finds that most business owners do not have adequate non-business assets to treat their heirs equitably.

Life insurance is an excellent way to equitably distribute assets to your children. The policy proceeds provide cash to be distributed to your children who are not involved in the business, allowing you to leave the business to those who are involved. Often, an irrevocable life insurance trust – a trust specifically designed to hold life insurance for estate liquidity purposes – is the best way to acquire and hold the life insurance policy. The trustee could be directed to distribute cash to your children as needed to equalize each child’s inheritance.

Passing the business to the next generation

Consider these additional planning strategies that may be used to pass your business to your children:

  • • Buy-Sell Agreement – provides an effective business succession planning tool. The estate tax value of your business may be limited by an enforceable buy-sell agreement. When funded with life insurance, the proceeds of a buy-sell agreement provide the much-needed liquidity for your estate at the exact time it is needed. Not only is cash available, but your business remains intact.
  • • Redemption – uses a cash distribution from the corporation in exchange for some or all of its stock, i.e., a stock redemption, to provide liquidity to the estate. If certain rules are met, you may be entitled to preferential capital gains tax treatment.
  • • Family Partnership – creates a structure for owning and managing businesses, real estate, securities and other assets. It allows you to retain control of your assets while giving limited partnership interests to your children. This retention of control is one of the most attractive, if not the most attractive, characteristic of a family limited partnership. In fact, interests in the partnership may be given to your children at a reduced value because limited partners have no control over the management of partnership assets. These so-called “discounts” help reduce or eliminate gift taxes for the amounts transferred to your children. The discounts can also reduce the value of your estate for estate tax purposes preserving the value of your estate for your heirs.
  • • Valuation Discount – gives a discount on transfers of assets to various family members for nonmarket ability and minority interests. Discounts are often discussed in conjunction with a family partnership as a way to implement a succession plan and shift income to the younger generation while reducing or eliminating gift and estate taxes.

Looking toward the future

Balancing both your family and business goals in a family-owned business situation usually requires compromise, planning and communication, so it’s important to begin making plans now for the future of your business. The most successful family-owned business owners have had to work conscientiously to overcome the challenges inherent in passing along the family business to the next generation.

Whatever your financial needs or goals, James Insurance Group and its Multi Insurance Carriers has the products and financial strength that can protect you and your business.

Looking for protection and guarantees?

You’ll get both with our Multi Insurance Carriers offering Family Business Planning.

Are you ready?

Take a look at what you can afford by contacting James Insurance Group today. Then ask yourself …can I really afford not to?

Life changes. We’ll be there.