Comprehensive Capabilities

  The foundation of AWP Life Brokerage is the belief that firms are strengthened by the ability to work in tandem as a unified consortium.  Our specializations include insurance concepts and...


Industry Leader

  AWP has proven continual leadership in delivery of benefits solutions for companies of any size as well as we continue to be a leading enterprise in life insurance planning and...


Institutional Relationships

Institutional accounts are integral to our overall distribution plan.  We define institutions as banks, wirehouses, regional broker dealers, and CPA networks. AWP has acquired recognition as a player in the institutional...


Pioneering Captive Insurance

Introduction Despite the fact that the concept of “captive” traces its origins to the beginnings of formalized trade, many people believe captive insurance companies to be a relatively new phenomenon.  Formed...


Premium Financing

Many affluent clients are aware of the benefits that life insurance can provide.  However, clients often harbor concerns that a substantial income tax liability will result from liquidating low basis...


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Buy/Sell Strategies

Overview


In a cross-purchase buy/sell agreement, in the event of death of an owner the surviving business owners agree to purchase the deceased owner’s business interest.  Effectively, each owner agrees to buy the others’ shares in the event of death, retirement, or disability – each business owner is the applicant, owner, beneficiary, and premium payor for insurance policies on the lives of every other business owner.  Upon a death, each surviving owner/beneficiary typically is entitled to receive the policy proceeds income tax-free.  Each surviving owner pays cash to the deceased owner’s estate and in reciprocation the estate transfers a pro rata portion of the deceased owner’s business interest.  In result, the estate’s non-liquid business interest is transformed into cash, and the surviving owners own 100 percent of the business.


One of the most notable benefits of a buy/sell arrangement is to fix a value for the business.  For a buy/sell arrangement to be sufficiently funded, the involved parties should aim to acquire life insurance coverage sufficient to cover the date of death value of the deceased owner’s interest in the business.  The most common practical methods of valuing a business in a buy/sell arrangement are:


Specific Fixed Price – Owners, by agreement, periodically fix the price.


Book Value – Value reflects the book value on the date of death.


Capitalization of Earnings – Value is determined by simple formula of multiplying earnings by a capitalization factor.


Formula – Value is determined by a more complex formula that incorporates multiple factors.


Appraisal – Value is determined through independent appraisal at the time of sale.


Advantages


Increase in Cost Basis – The purchasing owners receive an increase in cost basis in the acquired business interest that is equal to the full purchase price.  This is especially important if an owner sells the stock preceding his/her death, since capital gains tax will be paid on all proceeds greater than the purchaser’s basis.


Business Value – The business does not reflect the value of the life insurance policy on its balance sheet and thus, the value of the business is not subject to increase.


Alternative Minimum Tax – The business is not a party to the cross-purchase buy/sell arrangement and thus, the life insurance is not subject to alternative minimum tax.


Disadvantages


Number of Owners – The plan may require multiple policies and does not function effectively if the business has a large number of owners due to the number of policies required.  The formula to determine the number of required policies is N x (N-1), where N is equal to the number of owners (e.g., in a business with four owners, a total of twelve policies would need to be purchased [4 x 3 = 12]).


Transfer for Value – Unless they fall under one of the exceptions, the owners may violate the transfer-for-value rule where, in order to provide additional funds for a subsequent buyout, the decedent’s estate will transfer policies to the remaining business owners.


After-tax Cost – Owners may be in a higher income tax bracket than is the business, the resultant being higher insurance costs.  Additionally, owners must pay premiums with personal after-tax dollars as opposed to paying with the business checkbook.