Policies Provide Heirs Financial Flexibility, Operating Cash
Estate planning often presents challenges for family business owners as they strive to plan for business continuity while simultaneously generating accessible wealth for their families. Ensuring their companies and estates have sufficient liquidity to meet their liabilities in the face of increasing tax rates and limited borrowing availability can place additional pressure on these 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 that are not associated with other investments. Premiums are leveraged into death benefits which are generally not subject to income taxes when paid. If properly owned, death benefits can also be estate tax-free. The cash value component of a permanent life insurance policy grows tax-deferred and can be accessed tax-free while the insured is alive.
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 want to preserve it for themselves and their families. Unfortunately, much of that value can be lost when the owner retires, becomes disabled, or passes away.
Privately-held businesses should have a written succession plan in place that provides a legal mechanism for the transition of ownership under these circumstances without having to liquidate the company. Once such an agreement is finalized, the promises in it become legally binding. 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 purchase 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.
Grant, Hinkle & Jacobs is a great resource to talk to about life insurance and how it can benefit your succession plan. Contact us for additional education, policy advice or to help create a plan that fits your business and lifestyle.