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Giving Scrutiny to your Business Continuity Part 3
In this episode of "Giving Scrutiny to Your Business Continuity," we dive into the funding alternatives and agreement options for ensuring the smooth continuation of business operations in the event of a partner's death. We explore four funding alternatives, including borrowing, using corporate surplus, term insurance, and permanent life insurance. While borrowing may be challenging and term insurance becomes cost-prohibitive in the long run, the permanent life insurance alternative is shown to be the most cost-efficient, requiring only 16 cents to create a dollar.
Moving on to agreement alternatives, the Cross-Purchase agreement is typically preferred over the Stock Redemption agreement due to its tax advantages at death. However, in situations involving multiple shareholders, the Stock Redemption agreement may be more convenient, allowing the corporation to become the single buyer in the event of a partner's death. By structuring the Business Continuation Agreement as a Cross-Purchase, the surviving stockholder can benefit from a "stepped-up" cost basis, reducing the capital gain liability.
We also take a closer look at the concept of Split Dollar insurance, which allows business owners to use corporate funds to pay insurance premiums, providing personal insurance and cash benefits on a favored basis. Split Dollar is particularly suitable for C corporations, while S corporations often opt for the Executive Bonus concept. By making a collateral assignment to the company, the policy values can be utilized by the business and the premiums paid by the company can be reimbursed upon the insured's death, disability, or withdrawal. It is crucial to consult with legal and insurance advisors to navigate the complexities and select the most efficient option for business continuity planning.
Overall, this episode highlights the importance of carefully assessing funding alternatives, agreement options, and insurance strategies to ensure the financial stability and continuity of a business in the face of unforeseen circumstances.
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By Bill ByrneIn this episode of "Giving Scrutiny to Your Business Continuity," we dive into the funding alternatives and agreement options for ensuring the smooth continuation of business operations in the event of a partner's death. We explore four funding alternatives, including borrowing, using corporate surplus, term insurance, and permanent life insurance. While borrowing may be challenging and term insurance becomes cost-prohibitive in the long run, the permanent life insurance alternative is shown to be the most cost-efficient, requiring only 16 cents to create a dollar.
Moving on to agreement alternatives, the Cross-Purchase agreement is typically preferred over the Stock Redemption agreement due to its tax advantages at death. However, in situations involving multiple shareholders, the Stock Redemption agreement may be more convenient, allowing the corporation to become the single buyer in the event of a partner's death. By structuring the Business Continuation Agreement as a Cross-Purchase, the surviving stockholder can benefit from a "stepped-up" cost basis, reducing the capital gain liability.
We also take a closer look at the concept of Split Dollar insurance, which allows business owners to use corporate funds to pay insurance premiums, providing personal insurance and cash benefits on a favored basis. Split Dollar is particularly suitable for C corporations, while S corporations often opt for the Executive Bonus concept. By making a collateral assignment to the company, the policy values can be utilized by the business and the premiums paid by the company can be reimbursed upon the insured's death, disability, or withdrawal. It is crucial to consult with legal and insurance advisors to navigate the complexities and select the most efficient option for business continuity planning.
Overall, this episode highlights the importance of carefully assessing funding alternatives, agreement options, and insurance strategies to ensure the financial stability and continuity of a business in the face of unforeseen circumstances.