9015 / What issues arise when a family partnership is considering its small business succession strategy?

The preferred solution to the problem of transferring family partnership interests at death depends upon the particular type of family partnership and the circumstances surrounding it. A family partnership may be between two spouses, a parent and his or her adult child or children, the entire family, or the parent and a trustee or trustees, the latter acting for minor children. In some instances, disposition of the partnership interests by will may be a satisfactory solution. In most instances, a buy-sell agreement will be the preferred solution. Except in the case of two spouses, the income tax savings that result from the family partnership, by reason of spreading the business income, will more than pay the premiums on the life insurance used to finance the agreement.

When a family partnership has been formed by two spouses, it is sometimes assumed that there is no need for a buy-sell agreement to take effect at death. The spouse-partners may take the position that a buy-sell agreement is unnecessary because the survivor (assuming there are no children or other heirs) will take the interest in the business from the first-to-die under the intestacy laws of the state in the absence of a will. Moreover, in most states, each has a statutory right to one-third of the property owned at death by the other, and this right cannot be eliminated even by a will to the contrary.

Notwithstanding the circumstances that exist so far as inheritance is concerned between the spouses, a buy-sell agreement is practical and in some instances may be necessary in order to avoid serious problems upon the death of the first-to-die. See Q 9016 for a detailed discussion of the use of buy-sell agreements in the context of a family partnership.