Main Topics

Using Life Insurance in Business Succession



Capital gains exemption on small business shares


Paying estate taxes


Working with a partner


Key person insurance
Small companies are often dependent on the expertise of a few top people. If a major sales rep or a top researcher dies, it can hurt business prospects. Some entrepreneurs take out key person insurance to protect against the loss of their best employee. If that key person dies before retirement, the business will use the money to go out and recruit someone of equal experience, at a premium salary covered by the death benefit.

What if the entrepreneur wants to retire, and turn her business over to a promising heir? How can she turn her equity in the company into capital to fund her own retirement? Many small companies opt to continue paying a salary to the retired founder of the business. Or an heir can slowly buy her shares, supplying a regular income. However, if she has a universal life insurance plan, now may be a good time to take the value out of that contract to fund her retirement.

Mom and Pop Business
The smallest businesses may not be worried about paying estate taxes so much as leaving an equal legacy for each of their children when they cannot all be involved in the business. Milton and Betty Lau have built a Mom and Pop business valued at $1 million. They want to leave it in the capable hands of their daughter, Winnie, who has been a long-time participant in the business. But there is little outside the business to leave to their son, Percy, who chose a separate career.

At their deaths, both Milton and Betty can claim the $750,000 capital gains exemption. Their wills can specify that Winnie inherit the business. But both or either can take out insurance on themselves to ensure there is an inheritance for Percy. The policies would list Percy as beneficiary, and the money goes to him tax-free. Your advisor can recommend the amount of the insurance benefit - it is not necessary to equal the full $1 million value of the business because Winnie is inheriting something that requires a lifetime of hard work.