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When your estate plan includes a business partnership

Sole practitioners and those who share legal or medical practices with others have more complex estate planning concerns than many other Tucson residents. As you approach your retirement years, you may be faced with several options regarding your business practice.

Some of our clients decide to sell their interest in their medical or legal practice as they approach retirement. Others prefer to retain an ownership interest and perhaps maintain a limited practice even in retirement. But one thing is certain — decisions need to be made regarding the future of your practice once you have passed on.

Inherent value can change after a partner's death

A partner brings intrinsic value to a practice simply by their presence or the fact that they retain an ownership interest in the business. The business valuation can drop off — sometimes steeply — after a much-beloved managing partner steps down or dies.

That's why it's vital to draft a workable succession plan for your practice while you are still at your peak health.

What concerns should your business succession plan address?

Your business succession plan must arrange for a systematic transfer of ownership as well as the day-to-day management of your practice. This is especially important if you have remained involved in the business operations up until your demise. A viable management succession plan might include:

  • Naming successors
  • Delegating authority and responsibility to survivors and/or successors
  • Training, developing and supporting your successors
  • Appointing independent advisers to ease the transition

What about partners who have co-ownership?

Your business succession plan may include a clause where any co-owners have the right of first refusal to purchase your former ownership interest. These buy-sell agreements are an alternative to allowing spouses or other heirs to become co-owners of the practice. In some cases, it's advisable to purchase life insurance or irrevocable life insurance trusts (ILIT) that can offer liquidity needed to cover costs associated with the buy-sell agreements.

Avoiding probate always a goal

Most in this situation seek to avoid unnecessary tax liabilities and other costs of probate for their heirs and successors. To that end, it is prudent to confer with your financial adviser as well as your Tuscon estate planning attorney when arranging these transfers of ownership.

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