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6 8 V I N E YA R D & W I N E RY M A N A G E M E N T | J a n - F e b 2 017 w w w. v w m m e d i a . c o m SUCCESSION PLANNING Now that you have a handle on how life insurance funds a buy-sell agreement, let's look at an example of how you can use it to put a suc- cession plan into action. Using our original example, let's say the sister and brother own a winery valued at $10 million. Both have children who are involved in the business and own small minor- ity interests, but neither of their spouses is part of the business. Unless they've planned otherwise, at either's death, their share of the business falls to their respec- tive spouses. Now assume the brother passes. His wife is now an owner of the winery with the sis- ter. Unless the sister created some kind of funding mechanism to buy out her brother's wife, she must now continue to operate the busi- ness with someone who has no knowledge of operating a winery. Instead, let's say the sister and brother set up a buy-sell agreement so the winery owns insurance on all owners. At the brother's death, the winery receives the death benefit proceeds (generally free from income tax). The winery uses those proceeds to purchase the brother's interests from his wife. Consequently, the brother's shares are now proportionally distribut- ed among the remaining owners. The brother's wife now has liquid assets to maintain her lifestyle, and the sister is no longer partners with someone who's uninvolved in the winery business. Naturally, how you structure your buy-sell agreement and insur- ance policies should depend on your long-term goals for your busi- ness. But with careful planning, an understanding of your options and a bit of teamwork on behalf of your business and personal advisors, you'll be able to execute a strategy that aligns with your goals. REVIEW YOUR PLAN REGULARLY Even the best-laid succession plans, buy-sell arrangements and insurance policies can fail if they aren't revisited regularly. ued success. In these cases, there's little intention of fully retiring. This often makes a permanent policy more appropriate, because the insur- ance need may continue until death. When using life insurance to fund a buy-sell agreement, cross- purchase and entity-owned arrange- ments are generally the most common. Each arrangement defines how the life insurance will be owned and how the buyout will occur. In cross-purchase arrangements, each owner personally purchases a life insurance policy on the other owner. Let's return to our exam- ple of a winery owned by a sister and brother. In a cross-purchase arrangement, the sister purchases a policy on the brother and vice versa. This works well with two owners, but what happens when the brother brings his daughter into the business? Now we have three owners, and each person must own two policies, one on each of the other owners. That's a total of six policies. As you can see, the num- ber of policies increases rapidly as more owners are added. The alternative is to have the business be the owner and ben- eficiary of life insurance policies on each owner. This reduces the num- ber of policies to three. When one owner dies, the business receives the death benefit, funding the pur- chase of the deceased's shares and distributing the interests across the remaining owners. In addition to reducing the number of policies, this means there's only one trans- action to structure when an owner dies, since remaining owners don't personally have to buy their portion from the deceased's estate. A s y o u r b u s i n e s s d e v e l o p s , ownership interests evolve, long- term goals shift and value con- tinues to increase. The value you based your buy-sell on can quickly become outdated and, with it, the amount you'll need to buy out a departing owner. Unless you know the current value of your business, you can't know how much it'll cost to buy out a deceased owner's share. There are many ways to value a business, so be explicit in your buy-sell agree- ment. Having a clear, definitive and independent valuation method that's appropriate to your business will help reduce conflicts and keep the buyout process moving forward. To keep your business valua- tion, buy-sell agreement, life insur- ance policies and estate planning documents working in harmony, review them at least every five years (though insurance should be reviewed annually); when there's a relevant regulatory change; when there's a life-changing event, such as a marriage, children, divorce or change of ownership; and when there's a significant change in the value of your business. A s a b e s t p r a c t i c e , a l w a y s review your buy-sell agreement, life insurance and estate plan in tandem. Most important, work with all of your advisors — together — to create and review your buy-sell agreement, estate plan and other related documents. By granting each advisor a view into what the others (and you) are doing, you'll make sure they all align toward your ultimate goals. Aimee Kwain, senior insurance specialist at Moss Adams Wealth Advisors LLC, is an insurance and estate planning advisor. A practic- ing attorney since 1999, she incor- porates her legal background in the life insurance industry into her work reviewing and consulting on life insurance and estate planning for high-net-worth families. You can reach her at (310) 295-3727 or aimee.kwain@mossadams.com. Comments? Please e-mail us at feedback@vwmmedia.com. Advertise Now vwmmedia.com In Print Online