9017 / What special considerations arise when developing a business succession plan for a family partnership that is formed between a parent and adult children?

In this type of partnership, disposition of partnership interests by will on the death of a partner is seldom a satisfactory solution. In the case of a married child, a bequest of his or her partnership interest often would be made to a surviving spouse, and in many instances might lead to the liquidation of the business as being preferable to taking the surviving spouse into the firm. The same result could follow should the parent bequeath his or her partnership interest to the surviving spouse. On the other hand, if the parent bequeaths his or her interest to the children and such interest comprises the major part of the estate, the surviving spouse may be able to elect to take against the will and thereby upset the bequest of the partnership interest.

A specially designed buy-sell agreement usually will be a desirable solution. Under such an agreement the children will agree to purchase their parent’s partnership interest upon death and to maintain insurance on the parent’s life with which to finance the purchase. The insurance proceeds will be collected by the children, or by a trustee acting for them, and paid over to the executor of the parent’s estate to meet the cash needs of estate administration and to fulfill bequests to the surviving spouse of the balance of the funds.

Thus, the surviving spouse will be assured adequate income and will not be able to upset the plan, even though there is little other estate property. Where division of the estate is not a problem and the parent wishes to leave something to the children, the plan may be modified by giving the children a bargain price in the agreement, or by having them purchase a portion of the parent’s interest while he or she bequeaths the remaining portion to them.

In the case of a partnership between a parent and his married child, in most instances there should be a traditional cross-purchase agreement (see Q 8992 to Q 8999). Where there are at least two children as partners with their parent, the parent may not desire to increase his or her interest in the firm if a child dies first. In this case, the agreement should provide for a cross-purchase between the children in the event of the death of one of them.