Everyone is well aware of the fact that life insurance can be used to bolster the inheritances that you will be leaving to your loved ones. This being stated, there are some other utilizations that can provide targeted solutions, and we will look at some of them in this post.
Succession Planning for Business Partners
If you are a partner in a small business, you have to consider the fallout if your partner passes away. Their ownership interest would be owned by their estate, and you would have no control over the actions that are taken by the family of the decedent.
And of course, your partner would be in the same position if you die first. To address this type of situation, you can use a buy-sell agreement called the cross-purchase plan.
You and your partner would determine the value of an ownership interest in the business, and you would take out life insurance policies on one another. The proceeds would equal the agreed-upon value of a share in the business.
When one partner dies, the other partner will collect the life insurance proceeds, and they will be used to buy the ownership interest from the deceased partner’s estate. There is also an entity purchase or stock redemption plan, and the business entity would purchase the decedent’s share.
A buy-sell agreement can also be used to facilitate retirement or the opportunity to step away to pursue other interests, and the funding can potentially come from a different source.
Inheritance Balancing
Let’s say that you own a brewpub, and it has grown into a huge moneymaker with wholesale accounts to augment the business that you do in house. Your son decided to make the business his career, and he works alongside you every day.
The only other child that you have is a daughter who went to college out of state. She got a job in that state, and she is happy with her life. Your business is your most valuable investment, and you are definitely going to leave it to your son, and you don’t want to split ownership interests.
In a situation like this, you can use life insurance to balance the inheritances that you will be leaving to your two children. The proceeds can be calculated to equal the value of the business, and your daughter would be the beneficiary.
Estate Tax
There is a federal estate tax with a 40 percent maximum rate, and here in Connecticut, we have a state-level estate tax. These taxes are only a factor for high-net-worth individuals, because there are multimillion dollar exclusions that can be used to transfer a certain amount tax-free.
If your estate is going to be exposed to taxation, you could establish an irrevocable life insurance trust. You could convey policies that you already own into the trust, and the trust can purchase life insurance policies with funds that are transferred into the trust.
After your passing, the companies would pay out life insurance policies to the trust, and the money could be used to cover all or some of the estate tax responsibility.
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Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.