Life Insurance

Life insurance can enjoy an important role in the business succession plan. Following are some in the common ways that life insurance is usually integrated with a lot of of the tools, techniques, and methods commonly used operational succession planning.

Estate Liquidity. Some businesses will delay until death to transfer all or almost all of their business interests to a single or more of the children. If the entrepreneur has a taxable estate, a life insurance policy can provide your children receiving the business the bucks necessary for the crooks to pay estate taxes. Using insurance coverage (of an irrevocable trust) to cover estate taxes is especially useful to business people because business interests can not be readily liquidated. Life insurance is a much easier (and cheaper) option to deferring estate taxes under IRC Section 6166. All the children are receive the business also can need insurance coverage to pay estate taxes at their deaths. Typically, the insurance plan will be belonging to an irrevocable term life insurance trust in order for the beneficiaries will get the death proceeds both income and estate-tax free.

Estate Equalization. A entrepreneur can use term life insurance to provide those children who will be not active in the business with equitable treatment. Leaving the business enterprise to the active children and life insurance coverage (of an irrevocable trust) for the inactive children equalizes the inheritances among all with the children. It also avoids the necessity for the active children to buy the interests in the inactive children ? perhaps at any given time when the company may be not able to afford it. Depending within the particular facts and circumstances, the insurance coverage may be belonging to an irrevocable trust with the benefit with the inactive children, plus the insured(s) can be the business proprietor or the company owner and his spouse.

Buy-Sell Agreements. A properly designed buy-sell agreement can guarantee a place and reasonable price for a deceased, disabled or withdrawing owner?s business interest; ensure control over the company by the surviving or remaining owners; and hang the value with the business interest for estate-tax purposes. Life insurance is 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 could also be used tax free to aid pay to get a lifetime buying a company owner?s interest.


Key Man Insurance. Many family partnerships depend on non-family employees for your company?s continued success. To guard against financial loss due towards the absence of a vital 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 at a corporation (equal towards the amount of estate taxes and administrative expenses), at minimal tax cost, by way of a partial redemption of stock. To be sure that the corporation has sufficient funds that to accomplish the Section 303 redemption, the organization can purchase  a life insurance policy around the shareholder's life.

Hedge Strategy. Life insurance can also be used to produce a hedge against the small business owner?s premature death in association with a granter retained annuity trust. For example, if the business proprietor establish a GRAT and death prior to a end from the set term, the insurance coverage could be have been ever use covered the estate taxes within the GRAT assets that might be include in the company owner estate. In addition, if the sale that has a private annuity can be used, term life insurance could provide funds for the business proprietor?s spouse (and/or other loved ones) because the annuity payments would terminate on the business proprietor?s death. Similarly, a life insurance policy could provide funds for the small business owner?s spouse along with other family members should the entrepreneur die prematurely after by using a self-canceling installment note to sell the business enterprise interest. In all of those situations, make sure you have the a life insurance policy owned by an irrevocable trust in order for the insurance proceeds will escape estate taxes.