Business Continuation Using Life Insurance to Help Ensure the Continuation of Your Business INDIVIDUAL LIFE INSURANCE NOT INSURED BY FDIC OR ANY FEDERAL GOVERNMENT AGENCY MAY LOSE VALUE NOT A DEPOSIT OF OR GUARANTEED BY ANY BANK OR ANY BANK AFFILIATE FDI C BANK INSURANCE PRODUCTS: “The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries. This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
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BusinessContinuation
Using Life Insurance to Help Ensure the Continuation of Your Business
INDIVIDUAL LIFE INSURANCE
NOT INSURED BY FDIC OR ANYFEDERAL GOVERNMENT AGENCY
MAY LOSEVALUE
NOT A DEPOSIT OF OR GUARANTEEDBY ANY BANK OR ANY BANK AFFILIATE
FDIC BANK
INSURANCE PRODUCTS:
“The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries.
This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
The Forced Sale
• Sale may not return fair market value of equipment and inventory
• Outstanding accounts receivable difficult to collect
• Reputation, customer base, and location could be lost
• Family control will likely be lost
The Strategy: Business Continuation Plan
• Help provide cash to buy-out a deceased owner’s share
• Help ensure knowledgeable and informed ownership
• Help ensure profits benefit active owners
• Help create ready market and fair price for your share of business
• Help reduce economic pressure on heirs to liquidate other assets
• Help minimize risks of disputes with IRS
Successful Steps to Business Continuation Planning
• Determine the value of your business
• Decide on a source of funding
• Select a plan type
• Get your plan in place
Business Valuation Helps Eliminate Potential Conflicts
Values Per Share
Taxpayer Value
IRS ValueCourt Decision
Elapsed Time
$2,400
$10,638
$253
$6,530
$16,650
$1,033
$4,750
$16,111
$900
7 yrs., 6 mos.
10 yrs., 4 mos.
6 yrs., 2 mos.
Estate of Anna EwingPHTCMP 50296 (11/28/1`950)
Estate of Henry Huntington94 F2d 1019 (CA9 1938)
Estate of DavidLevenson282 F2d 581 (CA3 1960)
Funding the Buy-Out
• Borrowing
• Investment side fund, or sinking fund
• Installment payments
• Life insurance• Note: Life insurance policies contain
fees and expenses, including cost of insurance, administrative fees and premium loads, surrender charges and other charges or fees that may be incurred under the policy.
Types of Arrangements
• Entity buyout, or stock redemption arrangement
• Cross-purchase arrangement
Buy-Sell Agreement
How an Entity Buyout Arrangement Works
Insurance Company
Corporation Owner Estate
Death Benefit
Premium
Cash
Share of Business
The Effect of IRC Section 101(j)
Under Section 101(j) of the Internal Revenue Code, the death benefit of an employer owned life insurance policy may not be completely federal income tax-free if certain notice and consent rules and other requirements are not fulfilled. In addition, death proceeds may be included in your estate for estate tax purposes. You should consult your tax advisor.
• Generally income tax-free death benefit*
• Death benefit may not be included in estate of insured
• Potential step-up in basis in stock for surviving owners
• Redemption of stock by business entity may not be income tax-free event
• Premium payments are not a tax-deductible business expense
Tax Considerations for Entity Buyout Arrangement
* Although the death benefit is not subject to regular corporate income taxes, the corporate alternative minimum tax could apply.
• Generally death benefit received income tax-free
• Death benefit not included in estate of insured
• Surviving company owners can receive a step-up cost basis on stock purchased
• Premium payments are not deductible
Tax Considerations for Cross-Purchase Arrangement
• Each owner purchases policy on lives of other owners
• Owners use personal funds to purchase the policies or funds from business entity
• Premium payments would not be deductible to the business or employee
• A taxable bonus paid to the employee (who may use the proceeds to pay the policy premium) is deductible to the business, provided such compensation is reasonable
Financial Considerations for Cross-Purchase Arrangement
• Consult with your attorney or professional advisor.
• Ask your financial professional to help determine the most effective way to fund your plan.
Getting Your Plan in Place
This information is written in connection with the promotion or marketing of the matters addressed in this material. The information cannot be used or relied upon for the purpose of avoiding IRS penalties. These materials are not intended to provide tax, accounting or legal advice. As with all matters of a tax or legal nature, you should consult your own tax or legal counsel for advice.
"The Hartford" is The Hartford Financial Services Group, Inc. and its subsidiaries, including the life insurance issuing companies of Hartford Life Insurance Company (New York) and Hartford Life and Annuity Insurance Company (outside New York), Simsbury, CT. The mailing address for both issuers is P.O. Box 2999, Hartford, CT 06104-2999.
