If you own a business with a partner or partners, a buy-sell agreement can provide peace of mind in the event that one of you dies unexpectedly. This legal agreement outlines what happens to the business and the deceased partner`s share of it, including how much it`s worth and how it will be paid for. But what about the life insurance policies that fund the buy-sell agreement? Here are some tax implications to keep in mind.
The premium payments on the life insurance policies used to fund a buy-sell agreement are not tax deductible for the business. However, the business can make the premium payments and claim them as a business expense if the policy is owned by the business. If the policy is owned by the partner, the premium payments are not a business expense.
When one partner dies, the other partner(s) receive the death benefit from the life insurance policy. This death benefit is generally tax-free to the recipient(s).
Some life insurance policies accumulate cash value over time. If the buy-sell agreement is funded with a policy that has cash value, there are tax implications to keep in mind. When the policy is surrendered or sold, the cash value is subject to income tax. If the policy is transferred to the surviving partner(s), they take over the tax basis of the original owner. If the policy is transferred to the business and the business sells it, the gain is subject to income tax.
Life insurance policies are included in the deceased`s estate for estate tax purposes if the deceased owned the policy at the time of death. If the policy is owned by the business or the surviving partner(s), it is not included in the estate.
In conclusion, a buy-sell agreement funded with life insurance policies can be a useful tool for business owners. It`s important to understand the tax implications of the premiums, death benefit, cash value, and estate taxes. Consult with a tax professional to ensure that the agreement and the policies are structured in a way that minimizes the tax burden.