Business Life

The staff of Body Borneman is able to put together a life insurance program to fund a variety of business needs. Some of the needs and agreements we are able to fund include:

Key Person Life Insurance - Protecting Your Future Business Success 
Practically every company has "key" employees constituting the human factor responsible for the success of the business. There is no doubt the business would suffer a significant, material loss in the event of the death of such an employee. In addition to an immediate loss of profits, the business would suffer further losses, in the form of expenses, incurred while hiring and training a replacement. Just as fire insurance protects against the loss of plant, inventory or equipment, key person life insurance protects against the loss of human life value.

What is Key Person Life Insurance?
The primary purpose of life insurance is to offset economic loss due to an individual's death. It's easy to understand how life insurance indemnifies a family for the loss of income of a working parent. Key person life insurance is similar except it is a business that is indemnified against loss. Key person life insurance is purchased by a business on the life of an owner or employee whose services contribute substantially to the success of the business. The company is both owner and beneficiary of the insurance.

Buy & Sell Agreements - What Is A Buy-Sell Agreement?

A buy-sell agreement is an agreement among owners of a business (whether the business is conducted in the form of a partnership, limited liability company (LLC), or corporation) as to the eventual disposition of each owner's interest and can be a useful tool to achieve desired objectives. The owners of a closely-held business may enter into a buy-sell agreement to retain or transfer ownership and control of a corporation that provides a predetermined method of selling a deceased owner's interest in the business to the surviving owners. Buy-sell agreements are also used to restrict attempted dispositions of stock by stockholders during their lifetime (by sale or gift), in addition to restricting those who inherit from a deceased stockholder. Thus, a buy-sell agreement can effectively retain or transfer control among the stockholders during their lives and at their deaths. Such agreements are normally funded by life insurance on the lives of the owners. Buy-Sell funded agreements take the form of a corporate redemption agreement or a cross-purchase agreement among the owners.

Typical Buy-Sell Agreements

Cross Purchase Agreements - A typical cross-purchase agreement requires a stockholder who wants to sell out during his lifetime first to offer to sell his shares to the other stockholders. If they refuse to buy, only then can the stockholder sell his interest to outsiders. If a stockholder dies, or upon the occurrence of other specified events, the typical agreement requires the shareholder or his estate to sell, and the surviving stockholders to buy, his shares. 

Stock Redemption Agreements - A typical corporate stock redemption agreement obligates the corporation to buy, and the shareholder to sell, his shares at the price or under the formula specified in the agreement upon the occurrence of certain specified events. Alternatively, or in addition, such an agreement may include a right of first refusal procedure that requires a stockholder who wants to sell out during his lifetime, first to offer to sell his shares to the corporation at a price or under a formula which is specified in the agreement. Only if the corporation turns down the offer can the stockholder then sell to outsiders. In considering a stock redemption agreement, note that it must also conform to any local law governing redemption of stock. These different types of agreements may have different
tax and economic effects.

Using Life Insurance to Fund the Future Cost of Buying Shares of a Stockholder

In order to assure the availability of funds for the required purchase of a stockholder's shares, both the stock redemption and cross purchase types of buy-sell agreements may be funded with insurance on the life of the stockholder. Under the stock redemption agreement, the life insurance on a stockholder is bought and paid for by the corporation, and is made payable to the corporation. Under the cross purchase agreement, each stockholder buys, pays for and is the beneficiary of insurance on the lives of the other stockholders. Thus, each shareholder must purchase a policy on every other shareholder. Alternatively, under the cross purchase agreement option, it is possible to structure a cross-purchase plan which would require only one policy per insured owner by utilizing an escrowed ("trusteed") buy-sell plan. However, the plan must be properly implemented to avoid the transfer-for-value tax problems involved in the trusteed buy-sell agreement.

Benefits of Buy-Sell Planning

While buy-sell agreements can be an effective means of keeping and ultimately transferring ownership and control of a family corporation within the family, these agreements can serve other important planning goals. For instance, the buy-sell agreement can: 

• assure a market for the sale of the corporation's shares if the shareholder retires, becomes disabled or dies, 
• assure an employee/shareholder who is terminated from employment of a market for the sale of the corporation's shares,
• prevent the transfer of shares to shareholders who are not compatible with the present shareholders,
• preserve S corporation status by preventing ineligible shareholders from buying shares of the corporation,
• preserve S corporation status by preventing ownership by more than 75 shareholders,
• preserve S corporation status by complying with one-class-of-stock requirements,
• establish the value of the corporation's shares in some instances, 
• be a part of estate or gift tax planning,
• assure that persons who are no longer active in the business don't continue as shareholders.
  Other Forms of Business Life Insurance
• Split Dollar Life Insurance - This is not really a unique type of life insurance policy, but is a technique for "splitting" the cost and benefits of a life insurance contract. Simply stated, it is a method for sharing the premium, death benefit and cash value between two parties, usually the employer and the employee.
• Executive Bonus Life Insurance - A policy designed to provide individual life insurance to selected key employees. The premium dollars are deductible to the business as compensation and reportable by the employee as income. As the owner of the contract, the employee can name the
  beneficiary, make loans, take withdrawals, etc.
• Loan Repayment Life Insurance - A policy designed to pay off the unpaid portion of an outstanding loan should the owner of the business die.

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