You've worked long and hard to build a business. You are now at a point where retirement isn't that far off and the idea of leaving the business to your kids is attractive. Even better, they are interested in taking it over. Now all you have to do is figure out how to deal with the succession process. Life insurance will pay a big role.
Mention the name IRS and nearly everyone will start grumbling. Unless you've gone through a "super audit", you haven't experienced anything even close to dealing with the agency on a business transfer after an owner has passed on.
The agency isn't really at fault. The tax code written by Congress is the problem. It calls for estate and gift taxes to be paid on the passing of an individual for any transfers made to heirs excluding the spouse. Put in English, this means there are going to be tax ramifications for transferring the business to your kids. Big taxes.
Even better, the payment of taxes is due nine months after the passing of the person in question. That might not sound too bad, but think it through. A business is an illiquid asset. How do you come up with a huge chunk of change for something that might make a lot of money, but is itself rather intangible? You can't. This is the reason the Los Angeles Dodgers were sold by the O'Malleys and the Miami Dolphins were sold by Joe Robbie's heirs. There was no other way to come up with the tax bill.
Most of us don't have businesses that are worth hundreds of millions of dollars. A business worth $5 million or so might not be as glamorous, but it is a lot easier to transfer. One way to come up with the cash to pay taxes is life insurance. The policy is taken out on the life of the owner. When they pass, the insurance company pays out a large sum that can be used to pay the taxes. The life insurance has to be positioned correctly in an overall estate plan, but it can be the key to keeping a business in the greater family instead of selling it in a panic to pay the IRS.
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