How to Ensure a Smooth Transition for Your Family Business

Shawn Plummer

CEO, The Annuity Expert

When it comes to family businesses, one of the most important things you can do is ensure a smooth transition when it’s time for new leadership to take over. This can be tricky, but it can be done with careful planning and execution. This guide will discuss some of the key things you need to think about when planning a transition for your family business.

Utilizing Life Insurance To Transfer Ownership

A family business may be among your most valuable assets if you’ve devoted a lifetime to build it. A well-planned succession plan can assist you in orchestrating a seamless transfer into the company’s next phase, whether you want to sell it or gift it to your heirs after you’re gone.

The sort of life insurance policy you pick may significantly impact your strategy. Though the primary goal of life insurance is to prevent premature death, it may also be used as a tool to help you divide your estate or provide liquidity so that your company can continue operating after you’re gone.

If you want to pass your company on to family members when you are gone, a family buy-sell agreement involving life insurance may be appropriate.

Dividing The Family Business

It may be challenging to determine how to split a family business among heirs. In some cases, each heir is involved in the company, and the shares are equally divided. However, if one or more of your heirs refuses to participate in the running of the company, adding a life insurance policy into your succession plan can assist in distributing your assets fairly.

You want to provide an equal inheritance for your relatives, but dividing the business equally might lead to problems and tension between the active and inactive siblings.

While this is not an easy situation, it can be addressed through life insurance.

Providing A Smooth Transition

A family buy-sell agreement allows you to sell your business while also passing it on to your family members who are active in the company and a surviving spouse or other heirs who aren’t. A buy-sell agreement would be created between you and your relatives who wish to stay involved in the company under this type of arrangement.

Active family members might be the owners and beneficiaries of a life insurance policy on your life to pay for the purchase-sell.

Your company is included in your estate when you pass away, and the death benefit proceeds from your life insurance policy are tax-free to the active family members. They may use these funds to buy the company from your estate under the buy-sell agreement terms.

This method enables your business to go only to relatives who are engaged in it, and money is made available due to the sale of the company from your estate to family members who don’t want to participate.

Key Employees

Consider taking out key person life insurance to assist cover the financial loss of a high-ranking employee. This kind of policy, which is owned and paid out by the business, maybe critical for companies that rely on a small number of people with specialized skills or expertise.

Key person insurance can cover the business’s lost revenue and profits and the costs of recruiting and training a replacement.

A difficult emotional process is determining the future of a family business. However, you may avoid potential conflict and prepare your company and family for future generations to thrive by planning.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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