Updated: Oct 30
Utilizing life insurance as the funding vehicle for business succession planning is an efficient way to transfer deceased shareholder's shares to surviving shareholders by paying a death benefit to the deceased shareholder's estate.
This can be done in a few ways......
1 - CROSS PURCHASE PLAN - You can uses a cross purchase plan, but for three business owners you would need six life insurance policies, which is not very efficient in terms of administration, and there is no corporate oversight, which means no assurance of each partner paying their premiums. The more business owners, the worse choice this becomes.
2 - STOCK REDEMPTION PLAN - In a stock redemption plan, the corporation owns the life insurance policy, which means there is only one life insurance policy for each shareholder, making this a more efficient method in terms of administration. The corporation buys out the shares of the deceased shareholder and makes the other shareholders whole by default. The downside to a stock redemption plan is there is no step up in basis for remaining shareholders.
3 - INSURANCE Only LLC - With an insurance only LLC, you get the main benefit of the cross purchase plan, which is the step up in basis. You also get the main benefits from a stock redemption plan, which are simplicity in administration and corporate oversight.
When evaluating your shareholder operating agreement, we will look for certain keys clauses including:
Contact us for a review of your shareholder operating agreement.