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08/28/2007

Business Partner Life-Insurance Ensures Safety Net

Life insurance on the partners in a business can be an effective way to ensure that the business survives the partner�s death or disability, retirement or withdrawal, and provides funds to the beneficiaries of the partner.

There are two approaches to who owns the policy, which may have a substantial effect on the surviving partner/shareholder/member. However, the effect on the beneficiaries of the purchase is the same...capital gain accrues to the purchase of the interest in the business.

In the first approach (stock retirement plans), the company would own the policy and would then buy the deceased partner�s interest. Upon sale or dissolution, the partners would pay tax on any profit without the benefit of the increased basis.

In the second approach (shareholder cross-purchase plans), the partners would own the policy and would buy the deceased partner�s interest directly from the beneficiaries. It should be noted that in neither approach is the insurance premium a deductible expense.

Because buy/sell agreements are not simple as they indicate how the business will be valued, it should be in written form, and the use of experienced attorneys is advised. Agreement on the approach to valuation of the company is often revised as the business conditions change.

If, as in some cases, a partner(s) is uninsurable, a sinking fund approach could be used. This is when money is set aside periodically in a reserve account. The balance of this account would be a down payment on the lump sum due upon the event.

Although the loss of a partner can have a devastating effect on the business, as well as the person�s family, life insurance can provide funds which may help those affected by the tragic event.


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