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Garza Law Business & Estate Planning

The Lawyer with a (Big) Legal Problem

A couple of years ago, Frank, a lawyer, reached out to me for help. His senior business partner, Joe, had died unexpectedly and he was overwhelmed with picking up the pieces. He and his partner ran a thriving personal injury law practice. Joe had founded the practice decades ago and brought Frank in as a junior partner to one day take over the firm.

When Frank joined Joe, they prepared their own partnership agreement. Even though they were both personal injury lawyers and neither of them practiced business law, they figured they knew enough to prepare their own agreement. Once they signed the agreement, they stored it away in a folder on their computer and barely looked at it for years.

Frank died suddenly from a heart-attack and their practice was in shock. Joe was just starting to come out of the fog when Frank’s wife called him. She wanted to talk about Frank’s share in the practice and when she would be getting the payout for Frank’s share from Joe. That’s when Joe reached out to me.

“The practice is still reeling from Frank’s death. I just lost my mentor and friend. Frank’s death has been tough on everybody. Now, I’ve got Frank’s wife asking for her share of the business – what do I do?”

I looked over their partnership agreement.

“The agreement says life insurance can be used to pay Frank’s wife,” I said.

“Great! I was worried how I was going to come up with the funds to pay her,” Joe said, relieved.

“Where are the policies? Do you have copies of those? Do you know where Frank kept copies?”

Joe’s face went ashen. “Policies? Uh, I think Frank handled all of that.”

“Can you get me copies of the policies?”

Joe said he would try to do that.

After a few days, Joe called me back. “I can’t find anything.”

Joe searched for a few days more, but he could find nothing to show that he or Frank had purchased life insurance to fund the death provision.

Life Insurance: Critical for Buy-Sell Agreements

A buy-sell agreement is a special plan that says what happens if one of you wants to leave the business or if something unexpected, like a partner passing away, occurs. Life insurance acts as a safety net for that plan.

A lawyer can draft the best air-tight buy-sell agreement and death provisions, but if the agreement is not funded with life insurance to back it up, you or your business is on the hook for making the payout if your partner dies.

Here is why funding your buy-sell agreement with life insurance is so important:

  1. Financial Protection for Partners and Families: Like Joe and Frank’s situation, if one of your partners (or you) pass away, it could create financial difficulties for both the business and the deceased partner’s family. Life insurance acts like a financial cushion. It provides money that can be used to buy out the deceased partner’s share of the business. This helps ensure that the family receives fair compensation for their loved one’s share, and it prevents the surviving partner from struggling to come up with a large sum of money.
  2. Smooth Transition: Losing a partner, especially due to unexpected events, can be really tough on a business. It might disrupt operations and cause uncertainty. With life insurance, the surviving partner can use the insurance payout to buy the deceased partner’s share from their family. This way, the business can continue smoothly without major disruptions, and the family gets the value of the share.
  3. Affordability and Predictability: Life insurance premiums are often more affordable and predictable than trying to set aside a big chunk of money for a future buyout. It’s like paying a smaller amount over time to ensure that there’s a larger sum available when it’s needed most.
  4. Estate Planning Benefits: For the partner who passes away, life insurance can also be part of their estate planning. It provides a way to leave something valuable behind for their family while also ensuring that their business partner is taken care of.

Funding your buy-sell agreement with life insurance helps protect the interests of all partners and their families, ensures a smooth transition, and provides a fair and predictable way to handle unexpected situations. Making sure your agreement is funded with life insurance can give you the peace of mind of knowing your business won’t collapse under the financial pressure caused by a partner’s unexpected death.

Now is the time to consult with a business attorney to create a customized buy-sell agreement – one that is properly funded with life insurance – that suits your partnership’s unique needs.