Estate planning for small business owners will include some details that other people do not have to be concerned about. This is especially true when you have a business partner. In this post, we will take a look at the subject and explain the value of a device called a buy-sell agreement.
A Typical Scenario
Let’s say that you and a business partner purchased a restaurant many years ago. As a culinary school graduate, you run the back of the house, and your partner is in charge of the front-facing operation.
You are planning your estate, and your share of the business is one of your most valuable assets. No one in your family wants to be involved in the business after you are gone, and you want to facilitate a smooth transition for your business partner if you pass away first.
Buy-Sell Agreement
In a situation like the one described above, you and your partner could enter into a buy-sell agreement called the cross-purchase plan, and here’s how it works.
First, you huddle with your partner to agree upon the value of a share in your business. Then, you each purchase life insurance policies on one another with respective payouts that are equal to a share in the business.
After the passing of one partner, the insurance proceeds are used to buy the business share from the deceased partner.
In this manner, the family has liquidity that can be distributed among multiple heirs if that is the way the estate was planned. The surviving partner can continue to operate the business with full continuity.
Another commonly used type of buy-sell agreement is the entity redemption plan. With this one, a business entity will purchase the share of deceased partner.
We are looking at buy-sell agreements from an estate planning perspective. However, these agreements can be used to facilitate exits for retirement or any other reason, and life insurance is not the only possible source of funding.
Small Business Asset Protection
While we are on the subject of estate planning for small business owners, there is the matter of asset protection. You have to make sure that you preserve what you have worked to accumulate for your own purposes, and you want to protect the legacy that you will pass along.
Limited Liability Company
One structure that you can use to protect assets as a small business owner is a limited liability company (LLC). Generally speaking, your personal assets will be protected if the business is sued, but there are some exceptions.
On the other side of the coin, if you are sued, the business will be protected. However, distributions from the business to you could be attached via a charging order issued by a court.
Family Limited Partnership
Another effective structure that can be right for some people is a family limited partnership. As the name would suggest, the partners would be members of the same family. If you create one of these partnerships, you would be the general partner, and the other partners would be limited partners.
As with the limited liability company, property that is held by the partnership would be protected if one of the partners is sued, and vice versa. In addition to the asset protection, people who are exposed to the estate tax can use family limited partnerships to facilitate transfers at tax discounts.
Schedule a Consultation Today!
Regardless of your occupation, we can learn about your objectives and your family dynamic and help you create a plan that brings your legacy goals to fruition. You can call us at 888-222-1328 to schedule a consultation at our Phoenix, AZ estate planning office, and you can use our contact form if you would rather send us a message
- Are Handwritten Wills Legal in Arizona? - October 8, 2026
- Do All AZ Estates Go Through the Full Probate Process? - October 1, 2026
- New Arizona Transplant? Schedule an Estate Plan Review - September 24, 2026
Flagstaff
