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* Only one insurance policy is in force per stockholder.

* Policy cash values are available to the corporation; these values are not subject to creditors of the stockholders.

* The plan avoids transfer-for-value problems because a deceased or withdrawing stockholder has no ownership interest in policies that insure the remaining stockholders.

* The premiums are paid by the corporation (for a sub-S corporation) and are usually charged to the stockholders according to their relative ownership interest. Thus, an older stockholder with greater shares contributes more toward the premium insuring his life, reducing the burden on younger, less-paid minority owners.

* Because life insurance is an after-tax purchase, a stock redemption plan can be more cost-effective than a cross-purchase agreement if the corporate tax bracket is lower than the stockholders' tax brackets.

* Stockholders who are buying achieve a step-up in basis equal to the price they pay for the withdrawing or decease owners shares. This is an important advantage for a C corporation or an S corporation on an accrual basis.

* Policy cash values are available to the stockholders. These value are not subject to creditors of the corporation.

* The agreement avoids the imposition of the alternative minimum tax (AMT), which may occur when a C corporation receives tax-free death proceeds under a stock redemption plan.

* The agreement may avoid unintended shifting of control that can occur with redemption.

* The search for a lower bracket taxpayer favors a cross-purchase plan if the stockholders are in lower tax brackets then that of the corporation.

A major disadvantage of the traditional cross-purchase plan is the need for numerous policies when the corporation has more that two stockholders. For example: with five stockholders, twenty policies would be needed, four on each life. Funding the agreement with many small policies rather that one large policy on each owner is likely to result in higher costs and add confusion to the transaction.

A trusteed cross-purchase arrangement eliminates the need for multiple policies on each stockholders life, avoids the AMT, and provides the remaining stockholders with a stepped-up basis. For the benefit of the stockholders as a whole, a trust owns one insurance policy on each stockholder. Premium notices are sent to the corporation, which pays the premiums and then charges the salary or dividend account of each stockholder in proportion to his or her percentage of ownership.

At the death of a stockholder, the trustee collects the insurance proceeds and pays the purchase price to the decedents estate in exchange for a bill of sale of the stock to the remaining stockholders.

A deceased stockholders ownership interest is included in his or her gross estate for federal estate tax purposes. The purchase price under a buy-sell agreement establishes the value of that interest if (1) the heirs are obligated to sell the interest, (2) the agreement contains either a fixed price or a formula of determining the price, (3) the agreement prohibits owners from disposing of their interest in a lifetime sale without first offering it to the owners at no more than the contract price, and (4) the fixed price or pricing formula was fair and adequate when the agreement was made.

Business Insurance Articles
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Information on why business insurance is essential for any company.
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Important cost saving tips to lower your premium on your business insurance policy.
“Looking for methods to lower your insurance premiums? An insurance company bases insurance premiums on the risks involved. To do this, they evaluate the situation...”
Group Health Insurance
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Stock Redemption or Cross-Purchase
Find out about important considerations when getting out of a business.
“Every business owner will eventually get out of the business. In the absence of a child or other relative who can take his or her place, an owner needs to plan for the sale of his or her ownership interest...”
Workers Compensation
Learn about workers compensation and how it can protect a business from lawsuits and employment injuries.
“Workers’ Compensation-Employer’s Liability: Someone who provides any type of service for your business who are ill, injured, or die in the course of providing those services may attempt to claim an employment relationship with you, for the purpose...”
Business Property Coverage
Important considerations when determining how much coverage to buy for your business insurance policy.
“Some business owners learn the hard way that they didn't buy enough coverage. Remembering to consider certain pieces of your business property when purchasing an insurance policy is vital to keeping your doors open...”
Insurance Audits
Find out what to expect from an insurance company determining the premium for an insurance policy.
“More often than not, a large majority of commercial insurance is based upon a percentage of your sales and/or payroll for the year that the policy is effective for. Soon after your policy expires, you will be asked to provide...”
Advantages of Stock Redemption or Cross-Purchase
Learn about the advantages and disadvantages in different business plan agreements.
Employment Practices
Find out why an employment practices liability insurance plan may be needed in addition to a standard liability policy.
“Standard commercial liability insurance generally doesn't cover this area. This is where EPLI comes into play. Employment Practices Liability Insurance was started during the 1980’s, for employers who are targets of lawsuits...”
Family Business Insurance
Information about agreements related to a family business.
“When 50 percent or more of a business is owned by individuals who are members of the decedents family, or if they are natural objects of his or her bounty, the buy-sell agreement will be disregarded for federal estate tax purposes...”
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