The Benefits of Choosing Your Successor

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BOSTON (TheStreet) — Warren Buffett, secretly, has one for Berkshire Hathaway (Stock Quote: BRK.A). Rupert Murdoch made news when he tipped his hat with initial details of News Corp.'s (Stock Quote: NWS). Robert Benmosche nearly triggered one for AIG (Stock Quote: AIG) when he huffed and puffed about government oversight.

The "it" in question is a business-succession plan, something a surprising number of companies, particularly small businesses, lack.

A recent survey by MassMutual found that 62% of the businesses it questioned don't have a legally documented succession plan. That means that in the event of death, disability or divorce, the loss of leadership and resulting uncertainties could bring about hardship and controversy as heirs carve out a niche for themselves.

The low percentage of succession plans presents an opportunity for insurance companies like John Hancock and MetLife (Stock Quote: MET) as they market whole-life policies that can assist with the passing of the torch.

"At the end of the day, it's about where you want your business to go," says Beth Wood, assistant vice president of business owner advocacy at MassMutual. "So many business owners, especially small-business owners, worry about the day-to-day but forget about the long term and thinking about where they want their business to go in terms of ownership."

Wood relates a story told to her by a business acquaintance about how things can go wrong. In this instance, a man lost his wife to a car accident.

"After three weeks of grieving, he decided he needed to pick himself up," she says. "He walked into his wife's business, where her former partner was, sat down at a staff meeting and said, 'OK, I'm ready to work.' Because there was no buy-sell agreement, he inherited 50% of the company. His wife's former partner was shocked and, even though she didn't really care for the gentleman, found herself in the position of having a new de facto partner."

Even businesses that have a plan in place through a buy-sell agreement may be in for trouble if there isn't enough money for a buyout. As a result, a whole-life policy can do double duty in such a situation. The death benefit can be used to purchase the deceased partner's shares from an estate, funding the buy-sell agreement. It can also provide a guaranteed cash value.

Tim FitzGerald, president of TFG Financial in Shreveport, La., a New York Life Insurance agent who works in succession planning, said some companies try to fund buy-sell agreements with a combination of term insurance or mutual funds. That can cause problems when a business partner decides move on if the stock market tanks or investment gains cause a large tax liability.

Still, marketing whole-life policies to businesses in need of a succession plan has proven to be a challenge.

"When people ask me what I do, I say I work with closely held, dysfunctional family businesses," FitzGerald says. "There is always dysfunction going on in a family business. I will always have a job because I'm the guy who gets in there and mediates. A lot of what I do is counseling and holding hands and having one brother arguing with, and screaming at, the other brother. It is all about negotiating these buy-sell agreements."

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