Quick Facts
Age: 32/39
Client goal: To provide liquidity for a cross purchase buy-sell agreement in the event of a premature death of one of the two owners in a privately held business.
How the client was found: Client is a referral from a wealth advisor
Income / Net-Worth: $100M+ net worth; significant percentage of the client’s wealth is the value of the business
Concept Presented
Upon the death of an owner, the surviving owner will need liquidity to facilitate an orderly transfer of ownership interests and continuity of management.
Life insurance on each owner was purchased based upon a fair market value of the business and their individual percentage of ownership.
Advantages of using life insurance to fund this cross purchase buy-sell agreement
Life insurance proceeds are generally received income-tax free
Life insurance proceeds become immediately available upon death to purchase a deceased owner’s interest
Proceeds used to purchase the deceased owner’s interest provide liquidity for ordinary living expenses and to pay any estate tax liability
Surviving owners receive a step-up in cost basis in the acquired business interest
The value of the business does not increase because the entity does not own the policy
Cash value may be protected from claims of creditors
Key points we have spoken about:
Buy-sell agreements
Liquidity
Continuity of management and ownership interests
Income replacement
Estate taxes
Estate tax planning