A significant portion of the U.S. economy is composed 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 is not 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 a trusted financial professional, family businesses can work to understand their risks and create robust safeguards that 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 best level of protection against the risk of loss. By working with an advisor, owners can learn about all the nuances of life insurance plans and more effectively decide which is best for their unique situation.
“The right 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 setting up special life insurance plans to keep the business running if the owner or other key person passes away. As WealthManagement.com noted, an entity purchase agreement could work well in a variety of situations. With this agreement, a life insurance benefit would provide essential liquidity with which to cover the cost of estate taxes. This is because life insurance proceeds are generally 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 used to meet estate tax obligations or other costs associated with settlement. This can make the entire process much smoother than usual.
Life insurance trust
As a study from the University of Texas explained, the irrevocable life insurance trust has become a common way to effectively manage the complex needs of estate planning, especially regarding family businesses. One way an ILIT can be utilized to distribute ownership of a business to heirs is through the use of a grantor trust. Utilizing this approach, a business can distribute ownership of the business either from a gift of cash or through stock ownership. In an example provided by WealthManagement.com, a family-owned business wants to provide liquidity for one son who will inherit the company, but has another son pursuing a different career. By creating a grantor trust for the first son and 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 in a small business.
Estate planning is complicated for everyone, not just 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 assist 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 achieve.