TOPIC 39: EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS in .NET

Printer QR Code JIS X 0510 in .NET TOPIC 39: EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
TOPIC 39: EMPLOYER/EMPLOYEE INSURANCE ARRANGEMENTS
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1 Business continuation (buy-sell) plans A Buy-sell agreements make sure an estate can sell a business interest for a reasonable price The contract contains wording that binds the owner of a business to sell his or her share of the business at a speci ed price to a designated buyer, usually partners in the business B There are numerous bene ts for constructing a buy-sell agreement (1) Guarantees a market for a closely held business (2) Provides a source of liquidity for estate taxes owed (3) Allows for the continuation of the business with the other owners (4) Improved credit risk C Types (1) Cross-purchase agreement (a) Each owner purchases an insurance policy on other owners i Policy owner is also the bene ciary ii Upon the death of an owner, the owner s estate will sell and the other owners will buy the business interest of the deceased iii Insurance proceeds are used to fund the agreement (b) For example, assume three equal partners and one of them dies The two surviving partners will each purchase one-half interest of the deceased partner (c) Advantages/disadvantages i The surviving stockholders pay for the stock with after-tax dollars ii Premiums are paid with money that might have been taxed both to the corporation and to stockholders iii It is easy to form when there are a small number of stockholders iv The obligation to purchase the shares falls on younger shareholders who are often not in a position to buy the shares v This agreement results in fewer legal problems and tax consequences (2) Entity agreement (also called stock-redemption agreement) (a) The business buys the insurance on the owners i The rm is the bene ciary and carries life insurance on each partner ii Upon the death of an owner, the business will buy the business interest from the deceased owner s estate (b) Advantages/disadvantages
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120 - Employee Bene ts Planning i The corporation, not the stockholders, pays the life insurance premiums under the agreement premiums are paid with money that has been taxed only once to the corporation ii It is easy to form when there are a large number of stockholders iii It results in no dividend treatment iv The corporation may not have enough cash to redeem shares if life insurance is not used v The corporation can use installment payments of the purchase price to redeem shares Business overhead disability plan A Proceeds are used to cover ongoing operating costs of a business while the business owner is disabled, such as paying rent, salaries, taxes, and utilities B The elimination period is short; generally provides a bene t for up to two years C The purpose of the insurance is to continue to keep staff and premises available until business can resume when the owner returns D Premiums are deductible and bene ts are taxable Executive/owner bene ts (Section 162) executive-bonus life insurance A This allows an employer to provide life insurance protection for a selected employee on a tax-deductible basis B Upon the death of the employee, the insurance company pays the death bene t directly to the bene ciary; proceeds are income tax free Split-dollar A This allows an employer to provide life insurance protection for a selected employee B The death bene t is split as follows: (1) The corporation receives a return of its contributions, which is the cash surrender value (2) The bene ciary receives the net amount at risk C Employer and employee split (share) the premium: (1) Employee pays the portion of premium that is attributed to the economic bene t (= lesser of PS 58 cost or standard risk, one-year individual term rates) of the insurance protection in that year (2) Employer pays the remaining portion of the premium attributed to the cost of insurance (the amount equal to the annual increase in the cash surrender value) Key employee insurance A Insurance on a key employee and owned by the business who is also the bene ciary B Premiums are not deductible to the business C Death bene ts are tax free D The purpose of key employee insurance is to (1) protect the business against loss of business income and (2) provide funds for locating and training a replacement
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