Buy-Sell Planning While Generation Straddling

Buy-Sell Planning While Generation Straddling

Two of the top ten reasons that younger women say that they marry older men are, first, they have a better read on those with a more promising future, even if it is shorter; and second, if they sprain their ankle they can use their husband’s cane.

Pretty funny, but not unlike a couple of the underlying reasons it might make sense for a young entrepreneur to associate with an older colleague in a business venture.

The “kid” has the track record of the potential partner to serve as a good indicator how much the codger will bring to the table in the time remaining in his or her active work life. And the older businessperson has picked up things along the way that may come in handy to overcome unexpected hurdles (the cane, just in case you aren’t following the analogy).

But a disparity in age always seems to create a fly in the ointment when it comes time to do some business transition planning.

When insurance ledgers are run in anticipation of insuring for a buy-out in the event of death there is often sticker shock over the difference in cost between coverage for the young ‘un and the old fogie.

Clients expect some spread in cost due to age, but not that much – and it doesn’t help that the older proposed insured’s medical history isn’t as positive as it used to be (after all, you generally don’t use a cane because there has been an improvement in health).

If properly addressed this bump in the road shouldn’t be a problem. Assume a case where the partners will buy each other out with policies they own on each other on which each will pay the premium.

Consider:
  • Because the need for coverage is a measurable period of time that is less than life expectancy, term insurance can be used to considerably lower cost up front.  And it is usually eligible for conversion if the policy is needed longer for any reason.
  • The higher premium burden of the younger partner can be neutralized by double-bonusing the cost of coverage to both.  This equalizes the expense by creating a zero after-tax outlay and the business is now seen bearing the overall cost of the transition plan.
  • After that, focus on the benefits each is to derive from the agreement: either a) the assurance that their heirs will receive a fair price in the form of cash for the business interest, or b) the assurance of funds to buy out a deceased partner and future full ownership of the business.  What each partner derives from the buy-sell is exactly the same, exactly what they want, and exactly what they need.

An uninsurable partner creates different problems, but policy cost due to mere differences in age or insurable health should not be an objection.

Two other reasons in younger women’s top ten are that an older husband will introduce them to a whole previous generation of chick flicks (Thelma and Louise, Steel Magnolias and Breakfast at Tiffany’s), and he can help with homework.

Contact us with any and all questions that come up in buy-sell planning for clients of any age.