How many ways can your brother-in-law Larry sell you insurance to your family business? "Let me count the ways." To often the only insurance used is to fund a cross-purchase arrangement if a shareholder dies. There are a myriad of additional uses of life and disability coverage in the business context. Besides, your brother-in-law has his eye on a new Lamborghini. He can sell you insurance…
…to compensate children not receiving business interests in order to avoid conflict with children receiving the business interests. Insurance can be the "big equalizer".
…to fund payment of estate tax (e.g. a survivorship policy combined with by pass/QTIP trust planning to hold business on death of owner/active spouse).
…on the active spouse's life to compensate surviving spouse for loss of income resulting from death of active spouse.
…on the active spouse's life to compensate surviving spouse for loss of asset if business is bequeathed to the children in the business on first spouse's (i.e., active business spouse's) death.
…on the active spouse's life to pay estate tax so that the business can be transferred and bequeathed to the children in the business on first spouse's (i.e., active business spouse's) death.
…on the active spouse's life as key-person protection to help pull the business through the tough time of loosing an active principal, to hire a replacement executive, pay headhunter fees, training costs, help the business survive the loss of a rainmaker, etc.
…to fund a stock redemption purchase of a deceased shareholder's shares.
…to fund a stock cross-purchase of a deceased shareholder's shares by the surviving shareholder.
…to diversify the assets of the principal of a closely held business and accumulate wealth outside of the business.
…insurance held in an irrevocable live insurance trust to provide a means of growing an asset which is protected from the liability and/or malpractice claims of the business.
…as a perquisite for employees.
…to cover the estate tax cost gap if the business owner dies before the grantor retained annuity trusts ("GRAT") or sales to defective grantor trusts ("IDIT"), or other estate planning techniques, are effective.
Example: Business owner's estate planner includes a five and ten year GRAT to shift a significant portion of the value of the closely held business to her heirs. Use 5- and 10-year term policies to fund the estate tax cost if the grantor dies before each GRAT terminates.
…protect the often overlooked risk that more than one shareholder will die/retire/become disabled, etc. in one year. Most shareholder agreements ignore the risk of multiple payouts. A combination of disability buy out and life insurance may address this.
…use disability insurance to coordinate with the salary and benefits continuation period under the shareholders' agreement.
…use disability buy out insurance to fund the payment of the repurchase of shares from a disabled shareholder.
…use life insurance to offset the risk that the overly aggressive or improperly documented gifts of business interests will be successfully challenged by the IRS on audit. If gifts are not reported on a gift tax return and "adequately disclosed" the period in which the IRS can audit those gifts (statute of limitations) never ends.
…use life insurance as key person insurance to insure the lives of the younger generation members who are taking over the closely held business.
…use a new life insurance policy to replace an existing insurance policy/plan tainted by the transfer for value rule. The transfer for value rule, in its simplest application, is triggered where a life insurance policy is traded or sold for something of value. The result will be that the proceeds will be taxable as ordinary income upon receipt.
…use a new 3-year term life insurance policy to cover the risk of dying within three years of transferring an existing life insurance policy to an insurance trust (in which case the transferred insurance will be in your estate absent a provision qualifying it for the marital deduction.
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