Life insurance can play an important role in a business succession plan. Following are some of the common ways in which life insurance can be
integrated with many of the tools, techniques and strategies commonly used in business succession planning.
- Estate liquidity: Some business owners will wait until death to transfer all or most of their business interests to one or more of their children. If the business owner has a taxable estate, life insurance can provide the children receiving the business the cash necessary for them to pay estate taxes.
- Estate equalization: A business owner can use life insurance to provide those children who are not involved in the business with equitable treatment. Leaving the business to the active children and life insurance (owned by an irrevocable trust) to the inactive children equalizes the inheritances among all of the children.
- Buy-sell agreements: A properly designed buy-sell agreement can guarantee a market and fair price for a deceased, disabled or withdrawing owner’s business interest, ensure control over the business by the surviving or remaining owners, and set the value of the business interest aside for estate tax purposes. Life insurance is the best way to provide the cash necessary for the business or the surviving owners to purchase a deceased owner’s interest.
- Non-qualified deferred compensation plans (NQDC): A nonqualified deferred compensation plan can be used by a small business to provide members of the senior generation with death, disability and/or retirement benefits.
- Key man insurance: Many family businesses depend on nonfamily employees for the company’s continued success. To guard against financial loss due to the absence of an indispensable key employee, many companies take out key person life insurance.
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