Using your life insurance to fund a Buy/Sell Redemption Plan is just like trying to buy and sell a cross purchase plan. What you are doing is utilizing the proceeds that come from your life insurance to your funded plan to effectively make orderly changes of ownership on a close corporation, a partnership or a member. And similar to other basic buy and sell cross purchase plans, this could help in creating a certain market for a business. It will also help in providing the necessary money to be able to fund the plan and determine the right price that both parties can agree on buying and selling their business interests. So how do these buy and sell redemption plans work? The business owners or the corporation would first to initiate a redemption buy and sell agreement with the help of their own private attorneys, financial accountants and financial planners. The next thing the business would have to do is to buy and own a different life insurance policy on every individual owner. They would then pay the compulsory nondeductible policy premiums for each owner. If a death occurs among one of the business owners, the business will receive a tax-free income which comes from the death benefit proceeds of the deceased owner. The business entity will have to utilize the received proceeds to buy the share of business interests of the deceased owner. But what would be the advantage of using a life insurance policy. When you use the life insurance policy as a means of funding the purchase of the plan, it will just be similar to a buy and sell cross purchase plan due to the fact it would take the burden off the business to completely finance the buy and sell redemption deal as well as giving the company the opportunity to purchase the business interests of the deceased owner. Having the amount settled before a death occurs among the owner will be a great method of protecting the company from any potential litigation due to the deceased's estate. Using life insurance would create a lump sum of money that will be used to finance the buy and sell redemption agreement during death. However, there are also disadvantages of using life insurance to fund the buy and sell agreement. You should know that the life insurance premiums are not part of the tax-deductible company expenses. There is also the possibility of one or more of the co-owners to be illegible for insurance because of their age or illness. More insurance would be necessary to be able to cover the larger ownership interests if ownership percentage varies widely that would lead to higher premium costs for owners who have smaller ownership interests. Are there different types of buy and sell agreements? There signs that would tell you if you should avail of the buy and sell agreement if you have a great working relationship with your beloved life insurance agent. IF you do then your agent would be of great help to you in setting up the life insurance portion of the deal, going over the premiums and how would they be paid. With the help of your private attorney, financial planner and accountant, your life insurance agent would be able to help you set up the deal in your favor. Getting the value of the business on its present state and its potential value in the future will be significant since your insurance coverage should be able to equal the value of your ownership interests. Be very clear with how the company would the address the valuation difference. In this case, if ever you would die before you even retire, there is ample money from the policy proceeds or other ways of paying your estate in full for your portion of the company. But if it is presently not affordable then it would be better that you go ahead and shell out some cash for the moment. T cover the difference, your company might resort to increasing the amount of insurance or probably use additional financing methods. In this kind of situation, you will have to specify in the deal how your family or your estate would be paid completely for your part of the business. Don't forget to ask for advice from your personal accountants regarding tax implications to be able to completely ingest how this kind of agreement impacts the business or your estate.
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