A well-crafted sales contract can help your business find itself in good hands when you or one of your partners retires, decides to leave the business, become disabled, or die. A typical agreement could provide for the resale of a deceased partner`s shares to the business or other owners. This prevents the estate from selling the interest to a foreigner. If several business owners are looking for the benefits of a cross purchase contract, while avoiding the risks of a cross purchase, consider setting up an executive-run limited liability company („Insurance LLC”) to maintain and manage insurance policies that insalisting the lives of business owners. Existing policies held by owners can be transferred to Insurance LLC or new policies can be purchased by Insurance LLC. Each member of Insurance LLC is designated as the beneficial owner of the life insurance policies insuring other members whose ownership shares in that member`s business entity are to be purchased as part of the operating company`s purchase-sale agreement in the event of death. Life insurance policies must also designate Insurance LLC as the beneficiary. The fact that Insurance LLC owns all policies provides centralized administration and creditor protection for the policies it held and avoids the inclusion of inheritance tax for its owners, benefits that are not otherwise available if individual owners maintain the policies. It also avoids poor tax outcomes when an owner leaves the business and ownership of the policy needs to be adapted.
While integrating an LLC insurance into a buy-sell agreement can result in costs and complexity, the benefits of an LLC insurance can often outweigh those costs. The ownership of Insurance LLC is equivalent to that of the business unit and an independent person or corporate agent should play the role of manager. Each member of Insurance LLC must make capital contributions equivalent to the premiums on the life insurance policy for which that member is designated as the beneficial owner, in accordance with the member`s purchase obligation under the operating company`s purchase-sale agreement. If a policy has more than one beneficial owner, each member`s contribution to the policy premiums must be proportional to the member`s total percentage of participation in the business unit (if the purchase and sale provides for a pro-rated purchase). Example. A holds a total percentage stake of 35% in the business unit and B has a total percentage stake of 5% in the business unit. A and B are the beneficial owners of a policy that ensures C`s life, with an annual premium of $US 1,000. A would make an annual contribution of $875 (35%/40% x $1,000), and B would make a contribution of $125 (5%/40% x $1000). Typically, the operating unit pays life insurance premiums on behalf of its owners to ensure that premiums are paid. Provisions may be included in the operating company`s purchase-sale agreement, which requires the company to make contributions to Insurance LLC on behalf of its members, and the company must treat these contributions as distributions to its owners who, as mentioned above, are also the owners of the Insurance LLC.
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