Would Your Business Owner Clients Be Interested In A Tax-Deductible Buy-Sell?
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Most business owners know the value of having a buy-sell agreement (BSA), and many of those have realized the advantages of having their BSA funded in case of death or disability. Most often, these business owners have concluded that to fund a BSA properly, they will have to accept the fact that insurance premiums must be paid, either by the corporation or by the parties obligated to purchase the interest of a deceased business partner, and that those premiums will be paid on an after-tax basis.
Often, the structure chosen for the BSA will be a trusteed cross-purch
ase plan, so that the number of required policies is minimized, yet the surviving owners can receive a basis step-up in the deceased owners shares going to them.
But what if the entity could deduct the premiums being paid for the life insurance? Would that be the kind of planning your clients would be interested in considering?
Many advisors who have assisted clients in negotiating BSAs probably have not highlighted the unparalleled advantages of having the insurance premiums tax deductible to the business from day one. However, proper planning can accomplish this objective.
What we are talking about here is a properly established, properly run trust established under Internal Revenue Code Section 419A(f)(6).
Besides the tax deductibility of the premiums, several other favorable advantages arise from this type of plan. Most business owners, like real estate homeowners, have difficulty evaluating how much they should sell their business for. A typical cross purchase buy-sell via this plan allows the owners to minimize the costs and time associated of attempting to derive a "fair" consensual evaluation method and err on the side of a higher amount, which always will be appreciated by the beneficiaries.
In addition, if the business runs into financial difficulties and there is a claim on their assets, the insurance policies within the plan are not subject to creditors.
With C Corps, contributions to the plan have the additional benefit of resulting in a reduction in its taxable income. This in return would reduce the amount which would be transferred to the companys retained earnings account. A reduction in the amount going into the retained earnings indirectly helps avoid the company paying an accumulated earnings tax. The companys CFO will like the effect on the balance sheet.
Another nice administrative and less costly benefit of buy-sell agreements within the plan is the need for fewer actual policies. For example, with 5 owners, outside the plan, 20 policies need to be underwritten and purchased along with incurring the additional policy fees and costs, whereas the plan trustee needs only to purchase 5 policies. The fact that the business is paying the total premiums for the 5 owners also avoids the equity concern of younger, healthier owners having to possibly pay significantly higher premiums for a partner not as healthy and young.
