When business owners fail to consider the possibility that federal or state estate taxes could be due upon their passing, the cash needed to pay the bill may not be available, and heirs may have no choice but to liquidate the family’s business.
Even if your business valuation falls well below the current federal estate tax exemption level ($5.34 million in 2014), you might not be entirely out of the woods, especially if you live in a state that has an estate tax and/or an inheritance tax with a lower exemption amount.
The liquidity offered by a life insurance policy may help prevent survivors from being forced to sell assets or borrow money to pay taxes and fees. Purchasing the policy in an irrevocable life insurance trust helps keep the proceeds out of the taxable estate, allowing the benefit to pass to beneficiaries free of federal estate taxes.
Escape Strategy
Survivorship life insurance is a type of permanent life insurance that covers the lives of two people and pays a benefit after the death of the second person. Such policies are typically purchased by married couples, but business partners may find them useful as well.
Since the possibility that two people will die in a given time period is lower than the risk of one person dying, a survivorship policy tends to be less expensive than traditional life insurance. As a result, it may be a more affordable option for people who find they need life insurance later in life, when other policies may be too expensive.
Business owners may also find survivorship policies useful for funding buy-sell agreements. A survivorship benefit could be a good way to equalize inheritances among multiple children, provide for a family member with special needs, and/or fund a charitable donation.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.
There are costs and expenses associated with the creation of a trust. The use of trusts involves complex tax rules and regulations, so it’s wise to consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies.