Maryland Business Succession and Continuation Planning

What is a Buy-Sell Agreement?

A Buy-Sell Agreement outlines how ownership of a business is to transfer upon the death of a owner. Without a written Buy-Sell agreement all of the continuation options for family and business partners can be messy and complicated. Life insurance is the funding vehicle used to execute a written agreement.

What type of business needs life insurance for succession planning?

The two most common Maryland business structures, the LLC and the Sole Proprietorship, each have their own unique reasons for including life insurance as apart of their business succession plan. Beneficiaries of an estate often want money in return for their inherited shares or at a minimum a continued source of income. Even in Professional Corporations , where a regulated license must be held to take ownership, Maryland courts provide heirs avenues towards forcing liquidation without assuming ownership. The heirs of a deceased partner are not always capable, or interested, in running the business. Surviving partners usually want the business to continue under sole ownership or be able to choose other ownership using their own criteria. Assets that have not been planned for transfer using tax free life insurance can be taxable events for recipients, heirs, and surviving partners. This can result in major losses in value and even time due to the complicated process of probate.

What’s the difference between an estate plan and a business succession plan?

An estate plan covers the transfer of all assets, not just business, to the designated beneficiaries. A business succession plan is one that only details the transfer of ownership and assets related to that enterprise. For the Maryland Business owner, an Estate plan funded using life insurance can double as a business succession plan when it also includes how business ownership is to be transferred. Whether this is done in an estate plan, or outside of one in a operating or buy-sell agreement, life insurance is the most efficient way to fund the transfer of assets for all parties involved.

How do I set up a business succession plan?

An estate plan and a business succession plan can be detailed out by an estate attorney and accountant. It is most advantageous for owners of a business to include a succession plan within the operating agreement at the initiation of the company. Once the plan has been legally drafted and agreed upon, a life insurance policy can be implemented to fund its execution.

Other common uses of life insurance in a Maryland business

Businesses may choose to provide life and disability insurance to their employees as a benefit of employment. These Group Term Life Insurance plans are a popular way of retaining top talent and is tax deductible to the employer. Schedule “C” corporations can use life insurance as a way of further compensating executive employees under the IRC Section 162 rule, without having to worry about being labeled “excessive compensation” and threatened with higher tax burdens.

Life Insurance on the owners/operators can also serve a secondary crucial function as loan collateral for business loan approval.

What is Key-employee insurance?

Key employee’s carry all the same risk to the business and family involved, if death or disability was to occur, and similarly must be covered to ensure operational success. Life insurance, payable to the employer, can be issued on designated employees who’s loss would greatly impact the profitability of business operations. This benefit can be payable to both the company and the employee’s beneficiaries and is one of  3 types of Life Insurance all businesses need.

Is life insurance on a owner tax deductible to a business?

In general, when a life insurance policy benefits either the owner or the owner’s estate, it is not tax deductible. This includes even if the insured is a employee. A common example of this is when a spouse is working as an employee. Even though the spouse is a employee, because the coverage benefits the owner it can not be deducted. There are however some scenarios in which life insurance is deductible to a business.