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Cross-Purchase
Buy-Sell
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Redemption
Buy-Sell
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Parties to the plan
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The plan is between the owners.
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The plan is between the business and
its owners.
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Income tax treatment by surviving
business owners
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Purchasing business owners get a new
basis in acquired ownership interest.
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Survivors own a larger percentage of
the business, but the basis in the interest does not change.
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State law restricting redemptions
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N/A
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State law may require redemptions to
be made from surplus only.
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Family attribution rules. (IRC Section
318)
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N/A
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These rules may cause what appears to
be a total redemption of a decedent’s stock to be treated as a taxable
dividend.
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Availability of life insurance
policies to business creditors
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Not usually. If creditors are able to
“pierce the corporate veil,” policies may be available to them.
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Cash values and proceeds are generally
available to the creditors of a business.
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Premium payer
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Business owners. If the business pays,
it must be treated as additional compensation.
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The business. It is the owner,
beneficiary, and premium payer.
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Transfer for value issues
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A purchase of policies by a surviving
owner creates a transfer for value. This will cause proceeds to be partially
subject to income taxation unless the surviving owner is the insured.
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Since policies are owned by the
business there is no need to make a transfer when an owner dies.
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Complexity
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At death, there may be multiple buyers
of the decedent’s business interest. In an insured plan, this also means
multiple policies on each owner.
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At death, there is only one buyer (the
business) and one seller (the deceased owner’s estate).
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Number of policies required
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May require many policies. The formula
is: Number of owners multiplied by numbers of owners – 1. For example, if
there are 5 owners, you need 20 life insurance policies: 5 x (5-1).
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Requires only one policy for each
owner.
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Other considerations
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1.
If an owner is
having trouble paying premium, the policy may lapse.
2.
The cost of the
plan may be higher if the business is in a lower tax bracket than the
individual.
3. Voting power
may be altered in an undesirable way.
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1.
It permits
pooling of premium obligations
2. “Unreasonable
compensation” questions do not arise. This issue arises when salaries are
increased to pay premiums for life insurance used to fund cross-purchase
agreement.
3. Life Insurance
proceeds are included in adjusted current earnings for purposes of corporate
alternative minimum tax.
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