Most business owners carry some life insurance, whether it’s for their Buy-Sell Agreement, Key Person, Personal Income protection, Estate Planning, or to indemnify a loan. How that policy is structured could mean all the difference at tax time!
Policy ownership is the number one issue when it comes to taxation. Having the policy set up incorrectly could mean the difference between a Tax-Free Death Benefit and a Taxable Death Benefit.
Buy-Sell Agreements
Every business should have a continuation plan, either in the form of a Buy-Sell Agreement or via will. It should specify what would happen with their ownership if they died, were disabled, or wanted to retire. Typically, these agreements are drafted as Cross Purchase Agreements or Entity Purchase Agreements. Most businesses fund these agreements with Insurance, but how that insurance is owned will make a big difference in terms of taxation.
S-Corp vs C-Corp
Whether you own an S-Corporation (LLC) or a C-Corporation, having the insurance owned by that entity could seriously affect the tax treatment of the death claim. Not only do you possibly trigger a 15% Alternative Minimum Tax (AMT) on the death benefit, but you could also be increasing the value of the business at the worst time, your death. Plus, the loss of step-up in basis to the surviving owners could be even more devastating. Allowing us to review those policies, and determine the correct ownership structure can alleviate any worries, and ensure your insurance is set up in the most efficient way.
Personal Policies & Estate Planning
Currently, in 2017, each individual has a lifetime exclusion of $5.49m. Anything over that amount gets taxed at 40%. Keep in mind, this is subject to change and most likely will change going forward. Which is why having a plan that provides flexibility is essential. Even if your estate is not over that exclusion amount, you may still want to consider having your policy owned by an Irrevocable Life Insurance Trust (ILIT). An ILIT will provide creditor protection as well as outline how you want the money handled in the event you pass away and your spouse remarries.
Don’t wait until it’s too late! Contact Pat Driscoll or Tom Driscoll for a complimentary review of your policies.
