Life insurance can be used to provide income replacement to protect your family when you have people depending on you. If you have minor children, you can establish a trust to empower an adult to handle assets on their behalf. The trust can be the beneficiary of life insurance policies.
And of course, people use life insurance to bolster their legacies in a general sense. At the same time, insurance can be used to satisfy other objectives when you are planning your estate, and we will look at a few of the utilizations in this post.
Succession Planning for Business Partners
If you own a small business in partnership with someone else, you have to address the matter of succession. From an estate planning perspective, you can use a buy-sell agreement called the cross-purchase plan to facilitate a smooth transition.
To implement this strategy, you and your partner would get together to determine the value of the business share. Each of you would subsequently purchase life insurance policies on the other partner with a payout that is equal to the value of a share of the business.
When one partner dies, the other partner will collect the proceeds. The money will be used to purchase the deceased partner’s interest in the business from their estate. Going forward, the surviving partner can run the business, and the family of the decedent will have liquidity.
There is another type of buy-sell agreement called the entity purchase or stock redemption plan. The dynamic is the same with regard to the utilization of life insurance proceeds, but the business itself will purchase insurance.
These agreements can be used to allow someone to retire or step away from the business for some other reason, and the funding does not have to come from life insurance proceeds.
The best way to explain inheritance balancing is through the utilization of a simple example. Let’s say that you are the owner of a very successful restaurant. Your son has worked in the business all of his life, and your only other child is a daughter that has embarked on a different path.
Your business is your most valuable asset by a significant margin, and you are going to be leaving it to your son in your estate plan. Rather than trying to split up ownership interests, you can use life insurance to balance the inheritances that your children will be receiving.
You take out a policy that is going to pay out an amount that is equal to the value of the business, and you make your daughter the beneficiary. After your passing, both of your children will receive inheritances of equal value.
The federal estate tax is a factor for people that have large estates. In 2022, the exclusion is $12.06 million. This is the amount that can be transferred tax-free, and anything that exceeds this amount would be subject to the estate tax.
If your estate is going to be in taxable territory, you could use an irrevocable life insurance trust to hold policies. The proceeds would be used to pay the estate tax after your passing.
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