The following article was first published in 2009. It is being published here once again in its revised form. Editor

PARTNERSHIP AND CORPORATION BUY-OUT INSURANCE

BY BY ALAN PLAFKER, PRESIDENT & CEO
AND EDWARD HUTTICK, CERTIFIED FINANCIAL PLANNER
MEMBER BROKERAGE SERVICE LLC
A MELROSE CREDIT UNION SERVICE ORGANIZATION



In the Taxi medallion business, as in any business, you need a plan and agreement between partners. Whether it is just a partnership or partners that own a corporation together problems will come up if there is a death, disability or retirement of one partner.

There is Insurance that can address or fund these agreements but first you need a legal agreement. An attorney should be consulted to make sure it is done properly, and then you may choose to get some insurance so there are funds to buy out a surviving partner. Also, this agreement is something to consider when you are planning your estate with a trust or with an executed will.

Remember, if you fail to plan, you plan to fail. Here is some additional information about this important topic:

THE IMPORTANCE OF A BUSINESS CONTINUATION PLAN

Competing Interests of Heirs and Surviving Owners

These interests are many and may include the following:

What Heirs of Deceased Owner Want

• Top Dollar for their interests
  
  
  
• Prompt settlement of the estate
  
  
  
• Set value of business for estate tax purposes
  
  
  
• Relief for family of worries regarding the business and its creditors
  

What Surviving Owners Want

• Minimum cost for their interest
  
  
  
• Prompt transfer of the business interest
  
  
  
• Full control of the business – no interference from descendant’s family
  
  
  
• Continuing line of credit
  
  
  
• Retention of customers and employees
  

Potential Problems Without a Written Agreement

Frequent results include:

• Heated conflicts among the remaining owners and the decedent's family;
  
  
  
• Unhappiness on all sides, and sometimes litigation;
  
  
  
• Delays in settling the estate and continuing business growth;
  
  
  
• Loss of customers; and
  
  
  
• Possible liquidation of the business which may bring less than full value.
  

The Solution: A Written Agreement (and cash or insurance)

An agreement which is favorable to all parties can be more easily drafted prior to a crisis.

A Cross-purchase plan: Under this arrangement, the surviving partners purchase the deceased's interests or withdraw the partner's interest.

Taking the time now to see that the business will pass in an orderly manner at time of death will benefit all parties and their heirs. A written agreement can provide:

• An orderly transfer of the business;
  
  
  
• A mutually agreeable sales price;
  
  
  
• Mutually agreeable terms of sale;
  
  
  
• A value that is binding on the IRS for federal estate tax purposes, and
  
  
  
• Stability for customers, staff, creditors and investors.
  

A Buy-Sell Agreement Benefits All Parties

Benefits to Deceased’s Family

• Freed of business worries
  
  
  
• Not forced to sell assets.
  
  
  
• Family gets a fair price for business interest.
  
  
  
• Probate estate is settled more quickly.
  

Benefits to Buyer of Business

• The owner has full control of the business and its future earning potential.
  
  
  
• May alleviate concerns of creditors or suppliers.
  

Additional Lifetime Benefits

• The agreement can cover a buyout at retirement, disability or disagreement.
  
  
  
• It produces a sense of security that heirs are protected and that the business will continue.
  

Buy – Sell Agreement - Partnership

At death, the disposition of a partner's interest depends upon several key factors.

• Does the partner want his/her interest sold or retained by the heirs?
  
  
  
• Will death costs force the sale of the business?
  
  
  
• Can the remaining partners afford to buy the deceased partner's interest?
  
  
  
• Can the partners operate without each other?
  

In the absence of a continuation agreement, a partnership is dissolved at the death of a partner. The surviving partner(s) becomes the liquidation trustee who is responsible by law for dissolving and terminating the business.

Common Problems During Dissolution

During the dissolution process the liquidating trustee partner can expect problems.

• Creditors may become worried and may want to be paid immediately.
  
  
• Operating the business may be difficult without the deceased partner's skills.
  
  
• Debtors may not pay.
  
  
• The remaining partner may be forced to sell assets.
  
  
• Good will may be lost.
  
  
• Deceased partner's family may not understand why the income has stopped.
  

For more information, talk to your financial professional, legal advisor, or the author of this article.

Alan Plafker is President of Member Brokerage Service LLC, a Melrose Credit Union Service Organization. He is a licensed Insurance Broker and serves as Vice President on the Board of Directors the PIANY (Professional Insurance Agents Association of NY), serves on the Board of CIBGNY (Council of Insurance Brokers of Greater NY), and was appointed to the New York Independent Livery Driver Benefit Fund Board of Directors. His Agency insures thousands of polices for TLC Insurance as well as many policies for all types of insurance. You can reach him in his Briarwood, Queens office at (718) 523-1300 ext. 1082, or visit the website at: www.MemberBrokerage.com