Business Continuity and Long-Term Care Considerations

As a business owner, you know the importance of planning for your company’s future. To this end, you may have taken steps to learn about buy–sell agreements and the role that life insurance and disability income insurance can play in planning a business buyout. If so, you may be one step ahead of the game. But, have you thought about long-term care buyout planning?

A Buy–Sell Refresher
Let’s review an important tool for planning the future of your business. A buy–sell agreement is a legal contract that prearranges a buyer for your share of the business when a triggering event occurs, and it also stipulates the price that the buyer will pay. You may negotiate a buy–sell agreement with your partners, shareholders, members of your management team, or key employees who may have an interest in the company’s future ownership.

Buy–sell agreements are generally structured in one of two ways: as a cross-purchase agreement or an entity-purchase agreement. A cross-purchase agreement is negotiated between you and each partner or shareholder. If you die or become incapacitated, the parties to the agreement purchase your shares at a previously agreed on price. A cross-purchase agreement generally works best in companies with only two or three owners. As the number of owners increases, it can become expensive and administratively cumbersome for each owner to maintain an agreement with every other owner.

For a company with a larger number of owners, an entity-purchase agreement may be more practical. With this kind of agreement, the company takes out a life insurance policy for each owner. At a triggering event, the insurance money collected by the company is used to pay the estate of the deceased owner for that person’s share of the business. And the remaining owners avoid any out-of-pocket expenses. When the company buys back a departing owner’s shares, the value of the remaining shares increase accordingly.

Simply having an agreement in place does not ensure that funds will be available to buy your shares when the agreement goes into effect. Therefore, these agreements are often funded through life insurance (as is the entity-purchase agreement) and/or disability income insurance. In these cases, the triggering event would be death or disability. But what about the possibility of a long-term care event?

Preparing for Long-Term Care
To create a more comprehensive buy–sell agreement, you may want to consider planning for an accident or illness that requires long-term care. “Long-term care” refers to a variety of medical and nonmedical services provided to individuals with a chronic illness or disability.

Most long-term care involves assistance with activities of daily living (ADLs), including, but not limited to, dressing, personal care, meal preparation, and housekeeping. An individual is generally considered to be in need of long-term care if he or she has difficulty performing two or more ADLs due to physical limitations, cognitive impairment, or both. Services are typically provided in a nursing home, in an assisted living facility, or at home.

A long-term care event can come about suddenly, as a result of an accident or illness, or gradually, as part of the aging process. When an owner or partner requires long-term care, the company may find it difficult to continue to pay that owner’s salary, and other owners may not have the funds to buy the departing owner’s shares.

Preparing for long-term care when drafting a buy-sell agreement may be important to the future of your company. A buy–sell agreement could trigger the sale of a departing owner’s shares, and the agreement could be funded by long-term care insurance.  Long-term care buyout planning may help preserve the value of the business and ensure continuity. Be sure to consult a qualified long-term care insurance professional for more information.


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