Life Insurance as a Business Succession Plan
Life insurance is not something that many small business owners think of when they consider how their business will continue after they are gone, but it should be. There are several techniques and strategies commonly used in business succession planning that can benefit from mixing life insurance into the toolset.
Estate Liquidity: Waiting until your death to transfer all or most of your business assets to one or more of your children is a common method of succession. In fact, it is the default. If you have a taxable estate that includes the business, you may be startled by how much of your business’ assets the government wants to take away after you die. A decent-sized life insurance policy can save your business from the bulk of those taxes and leave it intact for your heirs.
Estate Equalization: Alternately, if you find that one of your heirs is more qualified to run the business but you do not want to leave the others out of the equation, purchasing life insurance in an irrevocable trust in the names of each of the other heirs can provide for an equitable distribution without leaving the business in less-capable hands.
Buy-Sell Agreements: A well-written buy-sell agreement guarantees a market and a fair price for a disabled or deceased owner’s interest, ensures control by surviving owners, and sets the value of the business for estate tax purposes. Life insurance on each owner, held by the others, guarantees that should one perish, the others will have enough money to purchase the deceased’s interest.
Section 303: IRC Section 303 allows a business to remove cash from a corporation equal to the amount of estate taxes and administrative expenses by having the business partially redeem the stock held by a deceased officer. An insurance policy on the life of said officer can give the business the cash it needs to perform the stock redemption.
These are hardly the only uses that a business might have for life insurance even just within the limited context of succession planning. Talk to your life insurance agent about further options but do not delay. The sooner you set up a plan, the more secure your business becomes.