Tag Archives: Business

Estate Planning – Equitable Distribution

How to distribute business assets when only two of the three children work in the family business?  Here’s how we worked this one out…….

Situation:  A 62 yr-old owner of a medical supply company valued at $5 million is married with three children – two of whom work in the business.

Issue:  Upon death, the business will transfer to the two children.  However, the client wants to compensate fairly the child who does not work in the business.

Solution:  Since the first two children will inherit a $5 million business, we recommended that the third child become owner and beneficiary of a $2.5 million life insurance policy (with death benefit guarantee, of course).

Benefits:  The insurance is kept out of the client’s estate and will pass to the beneficiary tax-free.  In addition, the child outside of the business is satisfied and the other two children own the business with no contingencies or outside interference.

For more information. go to: http://www.thriftytermquote.com/contact-us/

Business Continuation for More Than Two Owners – Second in a Series

In the previous article, I cited that an “Entity Purchase,” one in which, essentially, the business buys out the deceased shareholder’s beneficiary, presumably the spouse.  While this arrangement may seem logical, it is the least efficient from a tax-perspective.  This is because the remaining shareholders do not get a “stepped-up” tax basis on the newly acquired shares and wind up paying the maximum in capital gains taxes once they sell their share of the business.  What should they do?  Can they conveniently reduce their tax burden?  Some intrepid life insurance agents have suggested that the owners purchase multiple life insurance policies:  the formula for this is (the number of business owners – 1) x the number of business owners).  So, if there are three business owners, they should purchase a total of six policies ((3 – 1) x3)).  Here’s a better way that accomplishes the following:

1.  Simplicity.  Three business owners;  three life insurance policies.

2.  Stepped-Up Tax Basis.  Your capital gains taxes are minimized.

The solution is for a trust to be both owner and beneficiary of all the policies.  This way, when one of the business owners passes away, the trust receives the proceeds and buys out the deceased shareholder’s beneficiary.  Because of the trust arrangement, the remaining shareholders receive a stepped-up tax basis, and their capital gains taxes are held to a minimum.  A word of caution:  make sure that you get an attorney who has written these kinds of  trusts before.  You’ll save yourself a great deal of trouble by doing a bit of research first!

For more information, go to:  http://www.thriftytermquote.com/