When a co-owner/partner dies, the surviving business owners usually have five options in dealing with the deceased owner’s business interest:

1. Buy out the heirs of the partner with Life Insurance proceeds. This is usually the most preferred option. After all, the surviving owners/partners know how to run their business. It usually makes sense to buy out the heirs who are not engaged in or lack expertise in the industry and carry on business from there.

2. Keep the family heirs in the business. This would only be advisable if the heir was involved in the industry for some time or has skills that can advance the cause and profitability of the business.

3. Take on an outsider who purchases the deceased’s business interest. A good buy-sell agreement can circumvent the need for an outsider to buy into your business if that arrangement harms the current business partnership or the firm. In some cases, an outsider may already have an investment in, expertise, or a common business goal with your company that would mutually benefit everyone in the business. In this case, planning could allow such an individual to be part of the buying side of the buy-sell agreement. The same individual may need to be a beneficiary on the insured lives of all the partners, in tandem with being written into the contract.

4. Selling to the family heirs may be an option. This may be an option when some of the heirs are involved and successful in the same line of business as primary senior family members of the earlier generation who began your business. In this case, the considered heirs should receive funding from the proceeds of a well-planned fund to cover capital gains taxes, fund operations, and pay for the owner’s shares.

5. Liquidate the business or sell it to a third party. If this is the main goal, it is wise to involve discussions with the potential buyer long before one dies. If the business is large, you may need to hire a firm specializing in valuing and selling businesses. It is wise to estimate your capital gains exposure, cover any tax liabilities, and redeem business debts with the proceeds of life insurance, which can be paid out to the beneficiaries tax-free.

In most cases, option #1 offers the business owners the best choice, with a small expenditure to buy life insurance that makes a payment to heirs using a buy-sell agreement.