When COVID locked down the country, many companies had to scramble and implement a disaster recovery plan on the fly. What would the impact be on a business with the unexpected loss of a business owner due to disability or death? Having a proper plan in place when a business owner unexpectedly dies or becomes disabled can have a significant impact on both the survival and value of a company. Having a properly written Business Continuation Plan funded may help minimize the issues caused by the sudden loss of a business’s owner.
Why is a properly written Business Continuation Plan so important?
- Business Operations – Allows for the business to continue to operate uninterrupted
- Income Replacement – Business owner’s income can be continued for the surviving family
- A Fire Sale helps to avoid the sale of a hard-to-value asset at the worst possible time.
- Unplanned Partners – Plans ensure that the deceased or disabled owner’s interest doesn’t end up in unintended hands.
- Pegs the Value – Determines the appropriate third-party value of the company
- Liquidity – A properly funded plan ensures the funds will be available to buy out the family of the deceased owner at the time of death.
Questions you should be asking:
- Do you have a Business Continuation Plan?
- When was the plan last reviewed and updated?
- With business values at all-time highs, do you have an accurate value?
- Is the plan properly funded to buy the deceased owner’s family’s interest?
- What happens if someone is disabled and is not coming back to work?
- Will the company be around to buy out the owner’s shares?
- Do you have a Buy-Sell Agreement in place?
- Have you considered Key Person Life Insurance?
Why is it important to have a Buy-Sell Agreement?
A Buy-Sell Agreement ensures that surviving owners of a business have the right to purchase the interest of any owner when that owner dies. It also ensures that the deceased’s beneficiaries are fairly compensated for a business interest they inherit. Life insurance is often used in conjunction with a Buy-Sell Agreement, as it provides liquidity to fund the succession plan exactly when it is needed, upon the death of an owner. If you do an installment sale, it requires the family to rely on the company to be able to make payments over several years.
There are different ways a Buy-Sell Agreement can be structured. Each structure has its unique tax benefits that will be dependent on how the company is organized. Most Buy-Sell Agreements are funded through life insurance proceeds. If your company already owns life insurance on an executive, you should be aware the IRS requires annual reporting on employer-owned life insurance on Form 8925. This is not a form that is proactively created and is the responsibility of the business to complete.
Should you be considering Key Person Life Insurance?
Key Person Life Insurance is coverage taken out by an organization to protect the business against financial loss in the event of a key person’s death. The key person may be an owner, an executive, or anyone else whose death could create a financial hardship for the company. A key person insurance policy is owned and paid for by the company, insures the key person, and names the company as the beneficiary.
The professionals at MichaelSilver and Jamieson Financial Services are ready to help. We can assist you with your business continuity planning, valuation analysis, related Buy-Sell Agreements, and life insurance needs. Please contact us if you would like more details about any of the topics discussed above or if you have questions or concerns. MichaelSilver can be reached at 847.982.0333 and Jamieson Financial Services can be reached at 847.881.0233.
Matthew Jamieson, Vice President, Jamieson Financial Services – Following in his father’s footsteps, Matthew joined Jamieson Financial Services shortly after graduating from the University of Denver, where he was a Cherington Global Scholar. He also studied abroad at the University of Queensland in Australia. Matthew helps individuals and businesses with their life, disability, and long-term care insurance needs. Matthew also specializes in life and viatical settlements and oversees the firm’s IT and Marketing operations.
Laurie Kaplan, CPA, Partner, MichaelSilver, has served as a trusted advisor to clients for over 25 years, managing and addressing tax and accounting issues within a variety of industries. Laurie’s consultative approach allows her to partner with clients to address their personal and business needs. Laurie serves as the firm’s key employee benefit plan specialist, consulting and advising clients on plan selection, design, set-up, and administration. She also develops innovative solutions for her clients based on her expertise in like-kind exchanges, small business start-ups and estate and gift taxation.