Funding Ms.
D and her closest friend are the sole stockholders in a small corporation.
Each of them wants to be sure that she would have complete control if the other one died, so they enter into a stockholder's buy-sell agreement providing for this.
But neither of them, nor the corporation, has enough money to buy out the other's interest at her death, especially since the business has grown in value way beyond their original investment.
They use life insurance to provide funding in the following way: Each takes out insurance on the other's life, equal in value to a half interest in the corporation.
If one of them dies, the necessary cash is immediately available to carry out the agreement and buy the deceased's half of the business at its current value.
This establishes a new, higher cost basis for the newly purchased half of the business.
They could accomplish the same goal by having the corporation insure both of them.
Then the corporation would redeem the dead partner's stock, using the insurance money to pay for it.
However, no new cost basis would be established.
Should the survivor then sell the business, the first approach would result in capital gains tax on only the survivor's own original half of the business; a 50 percent reduction in tax.
The corporate-owned insurance would result in capital gains tax on both halves of the business.
In this case, not only having life insurance, but attending to its ownership makes a significant difference.
Mr.
E is the sole owner of a $3-million-dollar corporation.
He wants to be sure that his company will continue after his death for the benefit of his family, but he knows there will be a heavy demand for cash in the period immediately following his death.
It will be needed by the company to redeem stock so that his estate has liquidity to pay estate taxes.
It may also be required to pay off creditors, to hire key people to replace him, and to maintain the business community's confidence in the firm.
Life insurance can supply his company with this money.
The company can take out what is known as a "key man policy" on E's life and pay the premiums out of its surplus.
When E dies, the proceeds will be available, tax-free, to help the business through the many difficulties that lie ahead.
People in her community say that Ms.
F is rich.
They are right.
When she dies, she will leave her family an estate worth $3 million.
Having no surviving spouse, there is no marital deduction available to Ms.
F's estate.
Half her estate, less the $1,500,000 equivalent exemption that everyone is entitled to, will be subject to the estate tax.
The trouble is that none of her assets are liquid.
Where, then, is the cash going to come from to pay the $767,400 in taxes and administration expenses? Insurance is the answer.
It will be immediately available on her death to use for this purpose.
If it is owned by her children, or an irrevocable life insurance trust, the death proceeds will not be a part of her taxable estate.
This means that the other assets in her estate can be passed on whole, undiluted by losses that usually accompany a forced liquidation.
Mr.
G is a man with a number of business interests.
In some years he has heavy debts.
He is afraid that if he died in one of these bad years his creditors might wipe out his entire estate.
To forestall such a disastrous event, he carries insurance sufficient to meet all these obligations.
D and her closest friend are the sole stockholders in a small corporation.
Each of them wants to be sure that she would have complete control if the other one died, so they enter into a stockholder's buy-sell agreement providing for this.
But neither of them, nor the corporation, has enough money to buy out the other's interest at her death, especially since the business has grown in value way beyond their original investment.
They use life insurance to provide funding in the following way: Each takes out insurance on the other's life, equal in value to a half interest in the corporation.
If one of them dies, the necessary cash is immediately available to carry out the agreement and buy the deceased's half of the business at its current value.
This establishes a new, higher cost basis for the newly purchased half of the business.
They could accomplish the same goal by having the corporation insure both of them.
Then the corporation would redeem the dead partner's stock, using the insurance money to pay for it.
However, no new cost basis would be established.
Should the survivor then sell the business, the first approach would result in capital gains tax on only the survivor's own original half of the business; a 50 percent reduction in tax.
The corporate-owned insurance would result in capital gains tax on both halves of the business.
In this case, not only having life insurance, but attending to its ownership makes a significant difference.
Mr.
E is the sole owner of a $3-million-dollar corporation.
He wants to be sure that his company will continue after his death for the benefit of his family, but he knows there will be a heavy demand for cash in the period immediately following his death.
It will be needed by the company to redeem stock so that his estate has liquidity to pay estate taxes.
It may also be required to pay off creditors, to hire key people to replace him, and to maintain the business community's confidence in the firm.
Life insurance can supply his company with this money.
The company can take out what is known as a "key man policy" on E's life and pay the premiums out of its surplus.
When E dies, the proceeds will be available, tax-free, to help the business through the many difficulties that lie ahead.
People in her community say that Ms.
F is rich.
They are right.
When she dies, she will leave her family an estate worth $3 million.
Having no surviving spouse, there is no marital deduction available to Ms.
F's estate.
Half her estate, less the $1,500,000 equivalent exemption that everyone is entitled to, will be subject to the estate tax.
The trouble is that none of her assets are liquid.
Where, then, is the cash going to come from to pay the $767,400 in taxes and administration expenses? Insurance is the answer.
It will be immediately available on her death to use for this purpose.
If it is owned by her children, or an irrevocable life insurance trust, the death proceeds will not be a part of her taxable estate.
This means that the other assets in her estate can be passed on whole, undiluted by losses that usually accompany a forced liquidation.
Mr.
G is a man with a number of business interests.
In some years he has heavy debts.
He is afraid that if he died in one of these bad years his creditors might wipe out his entire estate.
To forestall such a disastrous event, he carries insurance sufficient to meet all these obligations.
