Simplifying Coverage with a Business Continuation General Partnership

Steven Gates   |   April 2021   |   1-minute read

The story

Clients are three equal owners of a business operating with an entity purchase buy-sell agreement. Due to growth, the business had a total of nine term policies in force to cover the buy-sell. Owners are concerned with having to buy even more policies to cover new growth, but they are also concerned with fulfilling their retirement goals. They are looking to see if they can service both needs with one strategy.

The business is an LLC, taxed as a partnership. The advisor engaged with Ash to determine if we could clean up the buy-sell plan along with helping them meet their retirement plan goals.

The problem

  • Easy administration of their buy-sell agreement funded with life insurance
  • Fulfill their retirement goals using profits from the business
  • Step-up in basis opportunity if death occurs for any shareholder

Client profile

  • Three or more owners
  • Taxed as a partnership or willing to create a separate partnership to service the buy-sell needs funded with life insurance
  • Established business with good cash flow

How it works

  • The partnership agreement must have language to allow for unequal distributions of partnership assets.
  • The partnership is owner/beneficiary of a policy on each owner. If death occurs, the partnership distributes the proceeds to the surviving owners allowing them to buy the shares from the deceased owner’s estate.*
  • Based on IRC 731, the partnership can distribute the policy upon an owner’s retirement in exchange for partnership interest without any recognition of gain. Due to this benefit, each owner applied for and was issued New York Life whole life cash accumulation life insurance.**

The result

The combined target premium for the three policies exceeded $40,000.

*This covers the ease-of-administration concern and the step-up in basis concern the business owners had. **This covers their desire to use business profits to help with their retirement goals.

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About the Author

Through analytical expertise, Steven Gates supports advisors serving high-net-worth clients and business owners. Using customized modeling, he creates insurance-driven strategies for wealth transfer, business protection and charitable leverage. Steven is the go-to guy when you need a unique blend of technological expertise, industry knowledge and entrepreneurial drive.