Most small business owners are so busy that they never take the time to think about what would happen in the event that one of the partners passes away or become incapacitated and can no longer function in the business.

Planning for these events is an essential part of the estate planning process that goes overlooked. Failure to plan for these events could have disastrous consequences for the partners and their family.

Typically, partners team up because they can combine their unique skills and abilities for the benefit of the business. Other times, it is the personal relationship between the partners that draws them into business together. When one partner passes away, the unintended consequence is that now the remaining partner is partnered with the deceased partner’s family or beneficiaries. The beneficiary might not have the ability or even desire to remain a part of the business. Likewise, the surviving partner might not want to be in business with the family members. Furthermore, the surviving family members were relying on the income from the business to pay their expenses.

A buy-sell agreement resolves this situation and the various dilemmas. The typical buy-sell agreement requires that the surviving partners “buy” out the partnership interest from the deceased’s partner family. Typically, the partners will own life insurance policies on the life of their partner. When the partner passes away, the remaining partner will use the life insurance proceeds to pay the family members. Both parties receive what they want. First, the family members will receive the financial support they need now that the person has passed away. Second, the surviving partner will be happy because now he or she can move on in the business and find a new partner should they choose.