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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Entity Purchase Agreement

In an entity purchase arrangement, the individual owners (and their heirs and successors) are obligated to sell, and the business entity is obligated to purchase a business owner’s interest upon the occurrence of a triggering event.  To ensure the provision of the funds necessary in the event of a death, the business entity is the applicant, owner, beneficiary, and premium payor for an insurance policy on the life of each business owner.

 

Upon the death of an owner, the business entity usually receives the insurance policy proceeds income tax-free.  Using the death proceeds, the business entity pays cash to the deceased owner’s estate/heirs, and in return the estate transfers the deceased business owner’s business interest.  The primary advantages of an entity purchase arrangement are that only one policy is needed per business owner and that the business checking account can be used to pay the premiums.

 

Several disadvantages exist when using an entity purchase arrangement with a C-corporation:


Alternative Minimum Tax (AMT)—AMT may apply to life insurance proceeds exceeding policy cost basis. (Note that the Taxpayer Relief Act of 1997 repeals the corporate AMT for “small business corporations” after 1997.  A small business corporation is generally defined by IRC §55(e) as one having annual gross receipts of less than $5 million.)


Lack of Capital Gains Treatment—It is vital that a corporate distribution in redemption of stock be exempt of taxation as a dividend under IRC §301.  Even though dividends are taxed at the identical rate as capital gains currently, they are not offset by the shareholder’s basis in the corporation.  A stock redemption generally must qualify as a complete redemption of all the stockholder’s interest in order to avoid treatment as a dividend.  Meeting these qualification may be challenging if other family members are owners, due to family attribution rules, under which a redeeming shareholder is deemed to own stock legally owned (directly or indirectly) by their spouse, children (blood and adopted), grandparents, and parents.  As such, sale or exchange treatment may be prevented in many family-owned corporations.


Lack of Increase in Cost Basis—Despite the fact that their percentage of ownership, and thus value of their interest in the business, will increase as a result of redemption, the surviving owners’ basis in their shares does not change.  Thereby, a larger portion of sales proceeds is exposed upon a subsequent lifetime sale to capital gains taxes.

 

Due to these disadvantages, a cross-purchase arrangement is generally preferred with a C-corporation, unless there are many shareholders (due to the prohibitive number of policies involved).