An important part of real estate planning for entrepreneurs who want to continue their business with their families is deciding when and to whom to transfer the business. The specific tools and methods used in the business succession plan depend on the goals and objectives of the four groups affected by the plan. Senior business owners, guest contributors, junior families involved in the business, employees, and families not interested in major non-family member companies. It is important to consider the important role that life insurance plays in a typical family succession plan.
1. Real Estate Liquidity
Real estate tax and alternation of generations tax are currently expired, but Congress may reintroduce both taxes (perhaps retroactively) in 2010. Otherwise, as of January 1, 2011, the inheritance tax exemption ($ 3.5 million in 2009) will be $ 1 million and the maximum inheritance tax rate (45% in 2009) will be 55%. increase. However, the author believes that if Congress acts, the inheritance tax exemption will be at least $ 3.5 million.
Some employers wait until they die and transfer all or most of their business interests to one or more children. If the business owner has taxable assets, life insurance can provide the recipient of the business with the money needed to pay the inheritance tax. Using life insurance to pay inheritance tax is especially useful for business owners, as their property rights cannot be easily liquidated. Children who receive business may also need life insurance to pay the inheritance tax. Since the insurance policy is usually owned by an irrevocable life insurance trust, the beneficiary can receive death income for both income tax and inheritance tax.
2th
Sales Contract
A properly drafted sales contract guarantees a fair price that is marketable to the deceased, disabled or retired owner. It also guarantees the control of the company by the surviving or remaining owners and can value the shares for inheritance tax purposes. Life insurance is the best way for a business or surviving owner to provide the money needed to buy the shares of the deceased owner. In many cases, the surrender value of a life insurance policy can also be used to pay for a lifetime purchase of the employer's shares (tax-exempt).
3. Real Estate Settlement
Business owners can use life insurance to provide "fair" treatment to children who are not interested in the business. Level the inheritance between them by leaving the business to active children and the life insurance to non-active children. Also, avoid letting active children buy the profits of inactive children, perhaps when the company may not be able to afford it. Depending on certain facts and circumstances, insurance may be owned by an irrevocable trust in support of a child who is not working and the insured is the employer or the employer and her spouse. there is.
4. Non-qualified Deferred Compensation Plan
The Non-qualified Deferred Compensation (NQDC) plan may be used by small businesses to provide death, disability, and retirement benefits to senior members. The NQDC plan is especially useful in situations where senior members have transferred their business to junior members and have not received any compensation. The NQDC plan guarantees that key employees will remain in the company during the transition period. These are the so-called "golden handcuffs". Life insurance is the most popular means of raising tax-deferred cash value and providing tax-exempt death benefits for "informal" financing of NQDC plan liabilities.
5
Key Person Insurance
Many family-owned companies rely on non-family employees for the company's continued success. To prevent financial loss due to the loss of key employees and to keep businesses in the family, many companies buy "key person" life insurance, disability insurance, or both.
6. Withdrawal of Section 303
The Internal Revenue Code Section 303 allows an employer's real estate to withdraw cash from a company at no tax expense. To be eligible for Section 303 redemption, the value of the shares must exceed 35% of the shareholders' net worth. In addition, the maximum amount that can be redeemed is limited to the amount of state inheritance tax, state inheritance tax, and funeral and administrative expenses. The company may take out shareholder life insurance in order for the company to secure sufficient funds to make the repayment of Article 303.
7. GREAT
In the Granter Retained Annuity Trust (GRANT), Granter transfers interest on the business to one or more children working in the business (“residual members”) while retaining a fixed entitlement. increase. A pension from maintaining trust for a period of time. The longer the period listed and the higher the pension, the fewer taxable gifts. At the end of the specified period, the remaining trust assets (without gift tax) will be transferred to the remaining owners. The risk of GRANT is that if the grantee dies during the specified period, all GRANT assets will be included in the grantee's property for the purpose of the federal estate tax. However, in such cases, by funding an irrevocable life insurance trust in favor of the GRANT remnants, the grantee can delegate the profits of the business to the GRANT remnants, and the GRANT remnants will have life insurance. You can use your income to pay federal inheritance tax. Alternatively, a married grantee may deduct GRANT's assets from the marriage and purchase the grantee's real estate assets at ILIT (for the benefit of the remaining members of GRANT) using life insurance income. You can.
Asset Protection Plan
Companies at risk of potential pollution (waste transport, landfills, chemicals, etc.) are subject to liability under federal and state pollution laws. In addition, business owners may also be personally liable under these laws, so such responsibilities are not limited to the business itself. As the company moves to the next generation, so do its potential responsibilities. Life insurance is ideal in these situations. Employers can establish an irrevocable life insurance trust that lasts for the longest period permitted by state law (that is, at least 90 years in most states and forever in a few states). The trust provides the descendants of the employer with the income and capital needed for health, education, maintenance, and support. When properly configured, beneficiary creditors, including state and federal environmental agencies, will not be able to reach the assets of the trust.
9. Individual Annuity and SKIN
In an individual annuity, the employer (pensioner) sells the business profit to one or more children (purchasers) working in the business in exchange for an unsecured promise of regular payments. To do. A business that the owner pays for the rest of his life (simple pension) or for the life of the employer and her spouse (joint pension and survivor's pension). Personal annuities are sales, not gifts, so businesses can remove business profits from their property without incurring gifts or inheritance taxes.
A child who has acquired a business right can fund an irrevocable life insurance trust for the benefit of the family and earn money to continue paying the pension if the business owner is killed. Conversely, an employer can fund an irrevocable life insurance policy for the benefit of the family as a protection from the employer's premature death. In either case, the amount of life insurance required is based on the present value of future annuity payments.
If the employer decides to sell the business to the child in installments, the promissory note may be a self-canceling installment (SKIN). With SKIN, when the seller dies, the rest of the memo-based payments are canceled, like a personal annuity. This cancellation feature requires the buyer to pay a "premium" through either a higher interest rate or a higher purchase price. Like personal pensions, SKIN avoids inheritance and gift taxes. Unlike personal annuities, SKIN grants the seller a security interest in the transferred business. As with the personal annuity, when using SKIN, the employer may fund an irrevocable life insurance policy for the benefit of the family to protect the employer from premature death. increase. Conversely, the buyer can fund an irrevocable life insurance fund for the benefit of the family, so if the buyer dies before the seller, he will have the cash to continue paying SKIN. You can put it in.
10. Family Bank
When deciding to include both active and inactive children in a business, it is generally advisable to leave voting rights only for those children who are active in the business. In addition, you need to enter into "put" and "call" contracts. Put options typically require the company to purchase all or part of the interests of inactive children on the company at specified prices and conditions. Without put options, there may be no practical way for non-working children to profit from ownership of business profits unless the business is sold.
On the other hand, the purchase option allows the active child (or the company itself) to get the business profit of the inactive child at the specified price and conditions. Without the termination option, active children may not have an effective way to avoid potential conflicts between active and non-active children who receive salaries and bonuses. I have. By having active children's own life insurance for older families, a "bank" is created to fund such puts and calls. Policies are usually outside the entity. For example, a trust for the benefit of active children or a limited company owned by active children.
Successor Development is designed to help entrepreneurs facing many problems. There is no one-size-fits-all approach to maintaining family business within the family. The tools and techniques that are best for your particular business are fact-specific. Life insurance plays an important role in supporting the survival and prosperity of businesses that are passed down from one generation to the next.
This article cannot be used for criminal protection. The materials are based on general tax law and are for informational purposes only. It should not be considered legal or tax advice, and taxpayers should contact their own legal and tax advisors regarding their particular situation.
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