Perfect Tips For Using Life Insurance in Business Succession Planning
Life insurance can play an important role in a corporate succession plan. Here are some common ways in which the life insurance can be integrated with many tools, techniques and strategies commonly used in planning for business succession.
Estate liquidity. Some business owners will wait until death to transfer all or most of their business interests to one or more of their children. If the business owner has a taxable estate, life insurance can provide the children receiving the company the cash necessary for them to pay estate taxes. Using life insurance (owned by an irrevocable trust) to pay the inheritance tax is particularly useful for business owners because of commercial interests can not be easily liquidated. Life insurance is also a lot easier (and cheaper) alternative to the real estate tax deferral under IRC Section 6166. Children receiving the company may also need life insurance to pay estate taxes upon their death. Typically, the insurance policy will be owned by an irrevocable life insurance trust so that the beneficiaries receive the death proceeds of both income and property-tax-free.
Estate equalization. A business owner can use life insurance to provide children who are not involved in business with fair treatment. Leaving the company for active children and life insurance (owned by an irrevocable trust) for inactive children equalize inheritances among the children. It also avoids the need for active children to buy the interests of inactive children - perhaps at a time when the company may be unable to afford it. According to the facts and circumstances, the insurance may be held by an irrevocable trust for the benefit of inactive children, and the insured (s) may be the business owner or business owner and his wife.
Purchase and Sale Agreements. A properly designed buy-sell agreement can guarantee a fair market price and interest for a business owner died, invalid or withdrawal and ensure control over the company by the owners surviving or continuing, and set the value of commercial interest for property tax purposes. Life insurance is the best way to provide the money to the company or the surviving owners to purchase the interest of a deceased owner. In many cases, the cash value in a life insurance policy can also be used tax free (at the base by selling and borrowing of the franchise) to help pay for a purchase life the interest of a business owner.
Nonqualified deferred compensation plans. Ineligible deferred compensation ("NQDC") plans can be used by a small business to provide members of the generation above death, disability and / or pension benefits. A NQDC plan can be particularly useful in situations where the upper of the company went to junior members and no longer receive any remuneration from the company. A NQDC plan is also useful to ensure that key employees remain with the company during the transition period - a so-called golden handcuffs. Because life insurance offers tax-deferred growth of cash value and death benefits tax free, it is the most popular vehicle for 'informal' liabilities NQDC plan funding.
Key Man Insurance. Many family businesses depend on non-family employees for the continued success of the company. To guard against financial losses due to the absence of a key employee needed, many companies take the key life insurance a person.
Section 303 Redemptions. IRC section 303 allows an estate of a unique opportunity to withdraw cash from a company (equal to the amount of property taxes and administrative fees) at a cost little or no taxes, through a partial redemption of stock. To ensure that the company has sufficient funds to complete the section 303 redemption, the corporation may purchase life insurance on the life of the shareholder.
Hedge strategy. Life insurance can also be used to provide a "hedge" against the premature death of a business owner in connection with a trusted provider retained annuity. For example, if the business owner has established a large and died before the end of the term fixed, life insurance could be used to pay property taxes on the major assets that would be included in the estate of the business owner. In addition, if a sale with a private annuity is used, the life insurance may provide funds for the spouse of the business owner (and / or other family members) from the annuity will terminate upon the death of business owner. Similarly, life insurance can provide funds for the spouse of the entrepreneur and other family members of the business owner should die prematurely after using a note to self-canceling installment sale interest of companies. In all these situations, it is advisable to have life insurance owned by an irrevocable trust for the insurance proceeds will escape estate taxes.
Family Bank. When the decision is made to leave the company for the children active and inactive, it is generally advisable to keep children active with voting rights and inactive children with non-voting interest in the company. In addition, the put options and call may be given. Generally, an option granted to inactive children allows them to require active kids (or the company itself) to purchase all or a portion of their interest in the company at a fixed price and terms. Without an option, there may be no practical way for a child to benefit from owning idle business interest unless and until the business is sold. Conversely, an option given to children assets (or the company itself) allows them to buy the commercial interests of inactive children on a fixed price and terms. Without an option, there can be no effective way for active children to avoid potential conflicts that may arise between active children who receive salaries and bonuses, and children who are inactive. With the assurance that active children own life on the life of a business owner, a "bank" is created to provide the funds necessary to meet all these calls and puts. Generally, the policy will be held outside of the business entity, as in a trust for the benefit of children active or a limited liability company owned by active children.
Estate liquidity. Some business owners will wait until death to transfer all or most of their business interests to one or more of their children. If the business owner has a taxable estate, life insurance can provide the children receiving the company the cash necessary for them to pay estate taxes. Using life insurance (owned by an irrevocable trust) to pay the inheritance tax is particularly useful for business owners because of commercial interests can not be easily liquidated. Life insurance is also a lot easier (and cheaper) alternative to the real estate tax deferral under IRC Section 6166. Children receiving the company may also need life insurance to pay estate taxes upon their death. Typically, the insurance policy will be owned by an irrevocable life insurance trust so that the beneficiaries receive the death proceeds of both income and property-tax-free.
Estate equalization. A business owner can use life insurance to provide children who are not involved in business with fair treatment. Leaving the company for active children and life insurance (owned by an irrevocable trust) for inactive children equalize inheritances among the children. It also avoids the need for active children to buy the interests of inactive children - perhaps at a time when the company may be unable to afford it. According to the facts and circumstances, the insurance may be held by an irrevocable trust for the benefit of inactive children, and the insured (s) may be the business owner or business owner and his wife.
Purchase and Sale Agreements. A properly designed buy-sell agreement can guarantee a fair market price and interest for a business owner died, invalid or withdrawal and ensure control over the company by the owners surviving or continuing, and set the value of commercial interest for property tax purposes. Life insurance is the best way to provide the money to the company or the surviving owners to purchase the interest of a deceased owner. In many cases, the cash value in a life insurance policy can also be used tax free (at the base by selling and borrowing of the franchise) to help pay for a purchase life the interest of a business owner.
Nonqualified deferred compensation plans. Ineligible deferred compensation ("NQDC") plans can be used by a small business to provide members of the generation above death, disability and / or pension benefits. A NQDC plan can be particularly useful in situations where the upper of the company went to junior members and no longer receive any remuneration from the company. A NQDC plan is also useful to ensure that key employees remain with the company during the transition period - a so-called golden handcuffs. Because life insurance offers tax-deferred growth of cash value and death benefits tax free, it is the most popular vehicle for 'informal' liabilities NQDC plan funding.
Key Man Insurance. Many family businesses depend on non-family employees for the continued success of the company. To guard against financial losses due to the absence of a key employee needed, many companies take the key life insurance a person.
Section 303 Redemptions. IRC section 303 allows an estate of a unique opportunity to withdraw cash from a company (equal to the amount of property taxes and administrative fees) at a cost little or no taxes, through a partial redemption of stock. To ensure that the company has sufficient funds to complete the section 303 redemption, the corporation may purchase life insurance on the life of the shareholder.
Hedge strategy. Life insurance can also be used to provide a "hedge" against the premature death of a business owner in connection with a trusted provider retained annuity. For example, if the business owner has established a large and died before the end of the term fixed, life insurance could be used to pay property taxes on the major assets that would be included in the estate of the business owner. In addition, if a sale with a private annuity is used, the life insurance may provide funds for the spouse of the business owner (and / or other family members) from the annuity will terminate upon the death of business owner. Similarly, life insurance can provide funds for the spouse of the entrepreneur and other family members of the business owner should die prematurely after using a note to self-canceling installment sale interest of companies. In all these situations, it is advisable to have life insurance owned by an irrevocable trust for the insurance proceeds will escape estate taxes.
Family Bank. When the decision is made to leave the company for the children active and inactive, it is generally advisable to keep children active with voting rights and inactive children with non-voting interest in the company. In addition, the put options and call may be given. Generally, an option granted to inactive children allows them to require active kids (or the company itself) to purchase all or a portion of their interest in the company at a fixed price and terms. Without an option, there may be no practical way for a child to benefit from owning idle business interest unless and until the business is sold. Conversely, an option given to children assets (or the company itself) allows them to buy the commercial interests of inactive children on a fixed price and terms. Without an option, there can be no effective way for active children to avoid potential conflicts that may arise between active children who receive salaries and bonuses, and children who are inactive. With the assurance that active children own life on the life of a business owner, a "bank" is created to provide the funds necessary to meet all these calls and puts. Generally, the policy will be held outside of the business entity, as in a trust for the benefit of children active or a limited liability company owned by active children.
Category Article Life Insurance
