Sell More Insurance

Summary:

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.