Business Partner Life-Insurance
Ensures Safety Net
Life insurance
on the partners in a business can be an effective way to ensure that
the business survives the partner’s death or disability, retirement
or withdrawal, and provides funds to the beneficiaries of the
partner.
There are two
approaches to who owns the policy, which may have a substantial
effect on the surviving partner/shareholder/member. However, the
effect on the beneficiaries of the purchase is the same...capital
gain accrues to the purchase of the interest in the business.
In the first
approach (stock retirement plans), the company would own the policy
and would then buy the deceased partner’s interest. Upon sale or
dissolution, the partners would pay tax on any profit without the
benefit of the increased basis.
In the second
approach (shareholder cross-purchase plans), the partners would own
the policy and would buy the deceased partner’s interest directly
from the beneficiaries. It should be noted that in neither approach
is the insurance premium a deductible expense.
Because
buy/sell agreements are not simple as they indicate how the business
will be valued, it should be in written form, and the use of
experienced attorneys is advised. Agreement on the approach to
valuation of the company is often revised as the business conditions
change.
If, as in some
cases, a partner(s) is uninsurable, a sinking fund approach could be
used. This is when money is set aside periodically in a reserve
account. The balance of this account would be a down payment on the
lump sum due upon the event.
Although the
loss of a partner can have a devastating effect on the business, as
well as the person’s family, life insurance can provide funds which
may help those affected by the tragic event.
