A significant portion of the U.S. economy is made up of family-owned businesses. According to a study from the Conway Center for Family Business, family-owned companies account for 64 percent of the nation’s gross domestic product, 62 percent of the workforce and 78 percent of new job creation. Clearly, family business isn't shorthand for unprofitable business. However, these companies are just as susceptible to the same types of risk as any other entity. By enlisting the help of the trusted financial professional, family businesses can work to know their risks and create robust safeguards which will keep them going for years to come, no matter what happens.
According to WealthManagement.com, life insurance provides a versatile option for family businesses looking to get the very best level of protection against the risk of loss. By working with an advisor, owners can learn about all of the nuances of life insurance plans and more effectively decide that is best for his or her unique situation.
“The best life insurance plan can help a business grow for generations.”
Entity purchase agreements
With the help of a certified financial professional, family business owners can receive assistance in establishing special life insurance plans to keep the business running if the dog owner or other key person passes away. As WealthManagement.com noted, an entity purchase agreement could work well inside a number of situations. With this agreement, a life insurance benefit would provide essential liquidity with which to cover the price of estate taxes. It is because life insurance proceeds are usually income tax free, and if structured properly, may also be free from estate taxes.
By combining this life insurance scenario with a buy-sell agreement, a business can effectively convert an owner’s accrued interest on a life insurance policy into cash. That cash can then be accustomed to meet estate tax obligations or other costs associated with settlement. This can result in the entire process much smoother than usual.
Life insurance trust
As a study from the University of Texas explained, the irrevocable life insurance trust is becoming a common way to effectively manage the complex needs of estate planning, especially regarding family businesses. One way an ILIT may be used to distribute ownership of a business to heirs is through the use of a grantor trust. Utilizing this approach, a business can distribute ownership from the business either from a gift of cash or through stock ownership. Within an example provided by WealthManagement.com, a family-owned business wants to provide liquidity for one son who will inherit the organization, but has another son pursuing another career. By creating a grantor trust for that first son as well as an ILIT for the second, the family is able to transfer liquid wealth toward the succession of their business while still being fair to the second child. This could also work to distribute risk exposure inside a small business.
Estate planning is complicated for everyone, not only small-business owners. The needs of individual family members must be balanced with the requirements of the law. This delicate procedure necessitates the help of a financial professional skilled with this area of advising. When family businesses find a trustworthy financial professional to help them with estate planning and succession needs, they can rest easy with the knowledge that their business will live on. With the right life insurance products, this goal becomes even easier to attain.