By this method, the operating company acquires life insurance on the life of each shareholder. The company is designated as the beneficiary of the policies and a purchase/sale agreement is entered into requiring the surviving shareholder or shareholders to acquire at fair value the shares of the deceased shareholder. After the death of one of the shareholders, the company receives the insurance benefit and pays the proceeds in the form of a capital dividend to the surviving shareholder, allowing it to meet the debt title. “With a buyout agreement, the company acquires separate life insurance contracts on the life of each owner, pays premiums and owns and beneficiaries of the contract. When an owner dies, the company uses the income tax-free death allowance to acquire the deceased owner`s shares,” says Muth. “With a buy-buy cross, each owner acquires a policy for the other owner or owners. If one of the owners dies, the survivor or survivors use the death money to acquire the deceased owner`s shares.  Rev. Proc 2005-25, 2005-1 CB 962, generally applies to the valuation of life insurance contracts for income tax purposes. Just as no good estate plan is complete without a will, no good business plan is complete without a shareholder pact. Here are four things to consider when setting up or verifying a sales contract. If many business owners wish to enjoy the benefits of a cross-purchase contract while avoiding the risks associated with a cross-purchase, the creation of a limited liability company managed by managers (“Insurance LLC”) should be considered in order to maintain and manage the insurance policies that ensure the lives of entrepreneurs.
Existing policies owned by the owners can be transferred to Insurance LLC or new policies can be purchased by Insurance LLC. Each member of Insurance LLC is designated as the economic beneficiary of life insurance policies that insure other members whose interests in that member`s operating entity are required to purchase to death under the operator`s sales contract. Life insurance must also designate Insurance LLC as a beneficiary. Insurance LLC is owned by all policies that provide centralized management and creditor protection for policies it has taken out and avoids the inclusion of inheritance tax for their owners, benefits that are not otherwise available if individual owners own the policies. It also avoids poor tax results when an owner leaves the business and ownership of the directive needs to be adjusted. While incorporating an insurance LLC into a buyback contract can increase costs and complexity, the benefits of an insurance LLC can often outweigh those costs. Insurance LLC`s ownership is that of the operator and an independent person or agent should act as a manager. Each member of Insurance LLC must make capital contributions equal to the life insurance premiums for which that member is designated as an economic beneficiary, in accordance with the obligation to purchase the member of the operator`s purchase-sale contract.