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Using Life Insurance in Business Succession Planning

by: Julius Giarmarco, Esq.

Life insurance can play an important role in a business succession plan. Following are some of the common ways in which life insurance can be integrated with many of the tools, techniques, and strategies commonly used in business succession planning.

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 business the cash necessary for them to pay estate taxes. Using life insurance (owned by an irrevocable trust) to pay estate taxes is particularly useful to business owners because business interests cannot be readily liquidated. Life insurance is also a much easier (and less expensive) alternative to deferring estate taxes under IRC Section 6166. The children receiving the business may also need life insurance to pay estate taxes at their deaths. Typically, the insurance policy will be owned by an irrevocable life insurance trust so that the beneficiaries will receive the death proceeds both income and estate-tax free.

Estate Equalization. A business owner can use life insurance to provide those children who are not involved in the business with equitable treatment. Leaving the business to the active children and life insurance (owned by an irrevocable trust) to the inactive children equalizes the inheritances among all of the children. It also avoids the need for the active children to purchase the interests of the inactive children perhaps at a time when the business may be unable to afford it. Depending on the particular facts and circumstances, the insurance may be owned by an irrevocable trust for the benefit of the inactive children, and the insured(s) may be the business owner or the business owner and his spouse.

Buy-Sell Agreements. A properly designed buy-sell agreement can guarantee a market and fair price for a deceased, disabled or withdrawing owners business interest; ensure control over the business by the surviving or remaining owners; and set the value of the business interest for estate-tax purposes. Life insurance is the best way to provide the cash necessary for the business or the surviving owners to purchase a deceased owners interest. In many instances, the cash surrender value in a life insurance policy can also be used tax free (by surrendering to basis and borrowing the excess) to help pay for a lifetime purchase of a business owners interest.

Nonqualified Deferred Compensation Plans. A nonqualified deferred compensation (NQDC) plan can be used by a small business to provide members of the senior generation with death, disability, and/or retirement benefits. An NQDC plan may be particularly useful in those situations where the senior members have transitioned the business to the junior members and are no longer receiving any compensation from the business. An NQDC plan is also useful to ensure that key employees remain with the business during the transition period a so-called golden handcuff. Because life insurance offers tax-deferred cash value growth and tax-free death benefits, it is the most popular vehicle for informally funding NQDC plan liabilities.



Key Man Insurance. Many family businesses depend on nonfamily employees for the companys continued success. To guard against financial loss due to the absence of an indispensable key employee, many companies take out key person life insurance.

Section 303 Redemptions. IRC Section 303 allows an estate a one-time opportunity to remove cash from a corporation (equal to the amount of estate taxes and administrative expenses), at little or no

Estate Planning is the procedure of identifying who obtains your ownerships, when they obtain those ownerships, as well as that deals with you when you are old. Plus, your estate plan determines that can deal with your kids.

The fundamental foundation of any sort of estate plan is a Will. This document is recognized much and wide as a paper that is composed by a lawyer as well as authorized by two or more witnesses and afterwards notarized.

Some people utilize a Revocable Living Trust rather of a Will. The Trust can do all the exact same points as a Will, however it does not have to go via the probate procedure to be reliable. On top of that, a Living Trust is many times used for tax preparing as well as philanthropic preparation.