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
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 the surviving spouse for
loss of assets if the 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, hire a
replacement executive, pay headhunter fees and training costs, help the
business survive the loss of a rainmaker, etc.
To fund a stock redemption purchase of a deceased shareholder's
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 buyout
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
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 from a provision qualifying it for the marital deduction).
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