Life insurance can enjoy an important role inside a business succession plan. Following are some from the common methods life insurance is usually integrated with a lot of the tools, techniques, and techniques commonly used running a business succession planning.
Estate Liquidity. Some companies will delay until death to transfer all or almost all of their business interests to 1 or more of these children. If the small business owner has a taxable estate, life insurance coverage can provide the youngsters receiving the business the income necessary for those to pay estate taxes. Using insurance coverage (belonging to an irrevocable trust) to spend estate taxes is especially useful to business people because business interests cannot be readily liquidated. Life insurance is a much easier (and cheaper) replacement for deferring estate taxes under IRC Section 6166. The children receiving the business also can need term life insurance to pay estate taxes at their deaths. Typically, the insurance plan will be belonging to an irrevocable term life insurance trust in order that the beneficiaries will get the death proceeds both income and estate-tax free.
Estate Equalization. A company owner can use term life insurance to provide those children who will be not working in the business with equitable treatment. Leaving the business enterprise to the active children and insurance coverage (belonging to an irrevocable trust) on the inactive children equalizes the inheritances among all on the children. Does it avoid the advantages of the active children to buy the interests of the inactive children? perhaps during a period when the organization may be cannot afford it. Depending about the particular facts and circumstances, the insurance coverage may be belonging to an irrevocable trust for that benefit from the inactive children, as well as the insured(s) might be the entrepreneur or the entrepreneur and his spouse.
Buy-Sell Agreements. A properly designed buy-sell agreement can guarantee market and reasonable cost for a deceased, disabled or withdrawing owner’s business interest; ensure control over the organization by the surviving or remaining owners; as well as set the value with the business interest for estate-tax purposes. Is Life insurance the greatest way to provide the amount of money necessary for this company or the surviving owners to obtain a deceased owner’s interest. In many instances, the money surrender value in a life insurance coverage policy doubles tax-free (by surrendering to basis and borrowing the) to assist pay to get a lifetime buying of a company owner?s interest.
Nonqualified Deferred Compensation Plans. A nonqualified deferred compensation (?NQDC?) plan is usually used with a small business to offer members with the senior generation with death, disability, and/or retirement benefits. An NQDC plan could be particularly useful for those situations in which the senior members have transitioned the business enterprise to the junior members and so are no longer receiving any compensation from the company. An NQDC plan is also necessary to ensure that key employees remain with the organization during the transition period? a so-called golden handcuff. Because life insurance coverage offers tax-deferred cash value growth and tax-free death benefits, it will be the most popular vehicle for informally? funding NQDC plan liabilities.
Key Man Insurance. Many family-based businesses depend on nonfamily employees on the company’s continued success. To guard against financial loss due to your absence of variety key employee, most companies take out key person a life insurance policy.
Section 303 Redemptions. IRC Section 303 allows an estate a one-time probability to remove cash from your corporation (equal on the amount of estate taxes and administrative expenses), at little if any tax cost, via a partial redemption of stock. To make sure that the corporation has sufficient funds in which to accomplish the Section 303 redemption, this business can purchase a life insurance policy for the shareholder’s life.
Hedge Strategy. Can Life insurance also be used to supply a hedge? against the company owner’s premature death regarding the grantor retained annuity trust. For example, if the small business owner established a GRAT and died ahead of the end on the set term, the term life insurance could be used to cover the estate taxes within the GRAT assets that might be included in the company owner’s estate. In addition, in case a sale that has a private annuity is needed, life insurance coverage could provide funds for the company owner’s spouse (and/or another family) because the annuity payments would terminate on the entrepreneur’s death. Similarly, life insurance coverage could provide funds for the entrepreneur’s spouse, as well as other family members, should the business proprietor die prematurely after utilizing a self-canceling installment note to sell the business enterprise interest. In all of the situations, make sure you have the life insurance coverage owned by an irrevocable trust in order that the insurance proceeds will escape estate taxes.
Family Bank. When the decision was created to leave the business enterprise to both active and inactive children, it’s usually advisable to leave the active youngsters with voting interests along with the inactive kids with nonvoting interests in the company. In addition, put and call options might be given. Generally, a put option given on the inactive children allows the crooks to require the active children (or the business enterprise itself) to buy all or a portion of these interest in the organization at a collection price and terms. Without a put option, there could possibly be no practical opportunity for an inactive child to profit from owning this company interest unless and until the company is sold. Conversely, an appointment option given on the active children (or the business enterprise itself) allows these to purchase this company interests on the inactive children upon an arrangement price and terms. Without a trip option, there might be no effective way for that active children to protect yourself from the potential conflicts that will occur involving the active children who’re receiving salaries and bonuses, along with the inactive children who’re not. By having the active children own insurance coverage on the entrepreneur’s life, a bank is created to offer the funds to meet up with any such puts and calls. Typically, the policy is going to be owned outside on the business entity, such as inside a trust for the benefit in the active children or using a limited liability company belonging to the active children.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.
Julius Giarmarco, Esq. of Giarmarco, Mullins & Horton, P.C. is often a partner and manages the firm’s Trusts and Estates Practice Group. Julius received his law degree (J.D.) from Wayne State University, and his awesome master of laws (LL.M.) from New York University. His primary practice areas include estate planning, business succession planning, wealth transfer planning, and term life insurance applications. Julius is really a former instructor within the Chartered Life Underwriter (CLU) and Certified Financial Planner (CFP) programs. He also lectures frequently on the national basis, including speeches prior to American Law Institute – American Bar Association (ALI-ABA), the International Forum, the Association for Advanced Life Underwriting (AALU), the Million Dollar Round Table (MDRT), and numerous a life insurance policy companies, brokerage firms and trade associations. Julius has published quite a few articles on estate planning appearing in professional journals like the Estates, Gifts and Trusts Journal (BNA), The Practical Tax Lawyer (ALI-ABA), the Journal of Practical Estate Planning (CCH) and Advisor Today. Julius is additionally the author on the nationally acclaimed brochure, The Five Levels of Estate Planning, as well as the co-author on the book, Estate Planning with Insurance. He is the author in the chapters on succession planning in Advising Closely Held Businesses in Michigan and The Michigan Business Formbook published from the Institute of Continuing Legal Education (ICLE). Julius has been selected by his peers to be a Michigan “Super Lawyer” in estate planning.