Key Person Life Insurance:
Often, the most valuable assets of any business are the key people who contribute most to its success.
Key Person insurance is a simple, efficient way to help protect a business against potential financial loss associated with the loss of a key employee.
A policy written on a key employee can benefit the business, the employee, and even the employee’s family. Key Person insurance can also provide the funds necessary to help recruit and train a replacement.
Why Key Person Life Insurance?
· It helps reimburse an employer for losses due to the death of the employee
· It provides immediate cash after the death of a key employee.
· It provides cost-effective liquidity to help the business function after losing a key employee.
· The policy’s cash value appears as an asset on the business’s balance sheet and may be used for business necessities.
Buy Sell Agreements:
Buy-sell agreements among co-owners or present and future owners of a closely held business are intended to assure the smooth future transition of its ownership.
They provide the mechanism and, if properly funded, the means, to effect a change in control and transfer of interests upon the occurrence of several events, including death, disability, and retirement.
When a business has reached a meaningful value, or looks like it will, owners of a closely held business should understand the need for a buy-sell agreement and the funding to assure that it can be implemented.
Reasons for Buy-Sell Agreements
Why do you need a buy-sell agreement for your business?
❑ To provide a market for the business interest of a deceased, disabled, or retired owner.
❑ To restrict transferability, both during life and at death, of ownership interests.
❑ To fix the value of, or at least the method of valuing, the business during life/death.
❑ To define the events that trigger the right or obligation to buy or sell the business.
Ownership and Beneficiary Arrangements of Buy-Sell Insurance Policies
The ownership and beneficiary arrangements for insurance policies funding the buy-sell agreement should be structured to minimize taxation. Consider the possible tax advantages of:
• Increasing the capital gains tax cost basis for the surviving owners by the amount of the insurance proceeds in order to reduce or avoid capital gains taxes on a subsequent sale.
• Having the business pay for buy-sell policies which are owned individually.
• Planning the eventual ownership and use of the insurance policies to reduce both income and estate taxes.
• Using cash value life insurance, rather than just term insurance, to have a tax-deferred means of funding a buyout at natural retirement instead of just at death.