Advanced Underwriting Consultants

Question of the Day – November 14

Ask the Experts!

Here’s the Question of the Day

Question: Is there a compelling reason for the owner of a closely held business to use money from the business to pay for life insurance needed to pay estate taxes?

Answer: Maybe.

There are usually few, if any, income tax reasons to have the 100% owner of a closely held business use business money to pay for needed life insurance.  However, there may be compelling gift tax reasons to do so.

When life insurance is used to pay for estate taxes, the coverage is usually owned by an irrevocable trust (ILIT), or, in the alternative, adult children.  If the insured transfers money to the ILIT or adult children by gift, the insured must deal with the gift tax limitations imposed by the federal and relevant state governments.

If the insured is worried about gift tax limits, it may be possible to access money from the business in different ways to provide the money needed for the premium:

1. A split dollar plan between the business and the ILIT may lower the gift tax cost of the premium.

2. If the adult children are employees of the business, the business may pay them extra to cover the premiums associated with the life insurance policy.

3. The business may be able to lend money to the ILIT or adult children to provide the premium needed for the coverage.

Each of these alternatives may lower or eliminate the gift tax cost associated with the insurance meant to pay the insured’s estate taxes.  However, each alternative has its drawbacks.  Talk with the proposed insured’s estate planning attorney and accountant to decide whether one of these might be the right choice.