Can a Business Combine the Benefits of a Cross-Purchase Plan with the Simplicity of a Redemption Plan?

The answer is…. YES, with an Insurance LLC.

  1. An LLC is established, and each of the owners of a business becomes a member of the LLC. 
  2. The individual owners of a business enter into a cross-purchase buy-sell agreement that obligates them to purchase each other’s interests in both the primary business and the insurance LLC following the specified trigger events in their buy-sell agreement.  
  3. The insurance LLC then purchases, owns and is the beneficiary of a life insurance policy covering each owner of the business.  In order to pay policy premiums, the members of a business transfer cash to the insurance LLC as a tax-free capital contribution. This can be accomplished using income tax deductible compensation they receive through an Executive Bonus Plan with a business under IRC § 162. 
  4. Following the death of an owner of the primary business, the death proceeds are paid to insurance LLC income tax-free.
  5. The surviving owners then use the proceeds received to buy the deceased owner’s interests in both the main business and the insurance LLC. 
  6. The surviving business owners will receive an increase in basis to the extent of the interests purchased from the deceased owner’s estate (or trust if the owners want to get into some estate planning).

 What if an owner of a business departs from the business prior to death due to disability or retirement?  His/her life insurance policy can be transferred to him/her as part of the buy-out.  If permanent insurance is used then the departing member has the added luxury of accessing policy cash values (income tax-free) for supplemental retirement income or other lifetime needs. 

The graphic illustrates both death and retirement of a business owner. For more information on the concept, contact Paul J. Phelan, (240)864-9117 or by email at phelanpj@ecsinsure.com.

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