Life Insurance Can Benefit Succession Plan

Policies Provide Heirs Financial Flexibility, Operating Cash

(Editor’s Note — David Jacobs is a partner with Grant, Hinkle & Jacobs, a group of advanced life insurance professionals who emerged from the attorney field.)

Estate planning often presents challenges for family business owners as they strive to plan for business continuity while generating accessible wealth for their families. Ensuring that their companies and estates have sufficient liquidity to meet their liabilities in the face of increasing tax rates and limited borrowing availability places additional pressures on family business owners. Fortunately, the incorporation of life insurance into a business owner’s succession plan can address a majority of these concerns, often in a tax-efficient manner.

Life insurance offers several benefits not associated with other investments. Death benefits paid under a life insurance policy generally are not subject to income taxes. If properly owned, they can also be estate tax free.

With thoughtful planning and the use of specially designed life insurance policies, the value of the business can be protected and family harmony preserved. In fact, life insurance is commonly used by the owners of successful companies to accomplish a variety of important business perpetuation and estate planning objectives.

Funding a Succession Plan

Owners of privately held businesses have worked hard over their lives to build enterprise value, and they want to preserve it for themselves and their families. Unfortunately, much of that value can be lost when the owner retires, becomes disabled or dies.

Privately-held businesses should have a written succession plan in place that
provides a legal mechanism for the transition of owner-ship under these cir-cumstances without having to liquidate the company. Once such an agreement is finalized, the promises in it be-come legally bind-ing. An insurance policy on the life of the business owner provides the buyer with the financial means to follow through on the agreement; without it, it could be just an empty promise.

Insurance on the life of each owner is the best way to fund a succession plan, because it provides the cash needed by the company or the surviving shareholders to purchase the departing owner’s interest in the business. The cash value in a life insurance policy, which grows tax-deferred, is accessed to pay for a lifetime purchase of an owner’s interest, while the death benefit is used to fund a pur-chase if the owner dies.

If policies are company owned, multiple policies may be used to fund this lifetime buyout, which means the insured doesn’t have to match the payee.