Business Buy-Sell Agreements Funded with Life Insurance
A buy-sell agreement is most commonly structured as either a cross-purchase approach or an entity-purchase arrangement. In the cross-purchase approach, individual business owners purchase life insurance policies on the lives of all other business owners. It generally works best when there are three or fewer business owners of relatively equal age and health status, all of whom can be depended upon to make timely premium payments. However, to help business owners with the insurance premiums, the company can bonus each employee-owner an amount equal to the required premuims. This method is refered to as a qualified IRS section 162 Bonus Plan. The cross-purchase approach also provides the most favorable tax basis for the purchasing owners.
In an entity-purchase (buy out) approach, the business purchases policies insuring the lives of each business owner. This strategy is simpler for the businesses with more than three owners, and it can equalize premiums paid for individuals of varying ages and health classes. Although the premiums are not tax-deductible to the business, the death proceeds are received income tax-free if IRS guidelines are met. Be sure to review your proposed plan with your tax advisor.
