Then, the death of the purchaser will not cause a default on the purchase agreement. The same principle would apply if the purchaser is one or more key employees. Any plan of succession will fix the value for estate purposes. Therefore, the structure of the sale transaction has many tax ramifications and the better approach is to include in the sale agreement terms for rental of real property, consulting contracts, etc. Use of insurance to build up a buyout fund Company buys life insurance policy on youngest key employee in buyout group.
Policy is funded with cash as quickly as company can afford it.
Cash invested in insurance policy will earn income free of tax. On accumulation in the policy of sufficient principal plus tax-free earnings, the company is in a position to redeem the stock of the withdrawing shareholder without recognition of gain on the accumulation inside the policy. Succession planning is an essential part of business planning for closely-held businesses. The team of individuals necessary for the development of a plan needs to meet with the owner seeking a device which will permit withdrawal from active participation in the business and removal of risk in an economically fruitful fashion. Michael L. Cohen is chairman and LaVerne L. Dotson is counsel in the Estate and Tax Planning Department at the law firm of Lane Powell Spears Lubersky.