Life Insurance for small business families
The purpose of this section is to identify common life insurance needs for small to medium sized business families. Browse the menu items to the left for more education on these topics.
When the owner and key shareholder dies there is a deemed disposition of shares of her private company triggering a capital gains tax liability and a need for cash to offset the loss of the key person. This is particularly common in small companies where the revenue and earnings growth is dependent on the owner and key person being there. Life insurance on the owner is generally the most tax efficient and economical way to fund these liabilities. As the business becomes more successful and the market value of the business increases a policy on the life of the owner is put in place to fund the increasing capital gains tax liability at death. Life insurance to fund buy/sell agreements for private companies with more than one shareholder including family shareholders creates the funding to support the buy sell-clause within a shareholders agreement on death, disability, and other provisions. If the agreement is not funded this can create unintended consequences at the death of the key shareholders whereby control is now shared with other owners including family members with different needs. There is also a Corporate Insured Estate Transfer Strategy when there is a need for life insurance, involves transferring surplus cash sitting in the Family Holdco and investing in a corporate owned cash value life insurance policy which grows on a tax sheltered basis. When the owner dies the death proceeds are paid into the corporation on a tax free basis at death and the proceeds of the death benefit in excess of adjusted cost basis (“ACB”) is credited to the capital dividend account (“CDA”) and paid out on a tax free basis to the Life Insurance to family shareholders. There is also a need for personally owned long term disability coverage or a corporate owned income loss replacement plan (“ILRP”) if there are other key non-shareholder executives should the owner suffer a long term disability or a critical illness.