How can a sole business owner protect the business’s value at death? Through these two measures:
This site is for financial professionals. It is not intended for consumers or the general public.
Are you a financial professional?
Sole business owner buy-sell strategy
1. One way buy-sell
Transfers ownership upon death.
Why choose a one-way buy-sell strategy?
How it works
1. The sole owner of a business enters into a buy-sell arrangement with either a key employee or a family member. The key employee or family member is the owner and beneficiary of a policy on the business owner.
2. The business bonuses premium payments to the key employee.
Death of a business owner
3. Upon death of the business owner, the key employee or family member is required to purchase ownership of the business from the estate of the deceased owner.
4. The key employee or family member then becomes sole owner of the business.
When evaluating a one-way buy-sell arrangement, consider the following:
- Need to specify what happens to the policy if key employee decides to leave the business
- Employee must pay income taxes on the premium payments made as a bonus
Take BOLD action
We’ve assembled the tools you may need to present to a client in one convenient stop.
Business succession tools and resources—tools and topics
Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.
Please keep in mind that the primary reason for purchasing life insurance is the death benefit.
Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.
Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.
The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.
An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.
This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.
For financial professional use only. Not for use with the public. This material may not be reproduced in any way where it would be accessible to the general public.