Advanced Underwriting Consultants

Question of the Day – May 24

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: We have a business policy that is just being issued. Currently the insured and the owner are the same person.  This is part of a buy/sell agreement.  Should the business/entity be the owner of the policy? What is the best structure for ownership?

Answer: There are two main ways to structure a buy-sell agreement where the business has more than one owner.  The first is as an entity purchase arrangement.  The second is as a cross-purchase arrangement.  It is impossible to say in the abstract which of these arrangements is “best” for a business.

Under an entity purchase arrangement, the business and the owners enter into a written contract—drafted by a lawyer—under which the business agrees to buy out an owner in the event of that owner’s death.  To fund its obligation, the business is the owner and beneficiary of life insurance policies on each of the owners.

Under a cross purchase arrangement, each of the owners of the company enter into a written contract—drafted by a lawyer—under which the owners agree to buy out a deceased owner at death.  To fund their obligations, each owner of the business owns and is beneficiary of life insurance on the lives of the other business owners.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.