Key Man for a small business

[arnguy]

"Life insurance proceeds paid by reason of the death of the insured are exempt from income taxation. This exclusion applies regardless of whether the beneficiary is an individual, corporation, or partnership, so long as the policyholder has an insurable interest in the life of the insured. However, the exclusion may be limited if the policy has been transferred for valuable consideration. The exclusion applies to split-dollar proceeds, group life insurance proceeds, and death benefits payments under worker's compensation insurance contracts or under accident and health insurance contracts having the characteristics of life insurance proceeds payable by reason of death.

Both lump-sum and installment payments are exempt...."

The Internal Revenue Code Reference for the above are Sec. 101(a)(1) and, also, Internal Revenue Regulation Sec. 1.101-1.

The above appears in Par. 601 of the 2007 Federal Tax Compliance Manual published by CCH. (The bold and italics are mine.)

 

[bobson]

Humm, you are correct, in the above example Mrs Bob is gonna pay taxes with discounted insurance dollars, I'm sure that'll ease the pain. Plus Joe is gonna buy a business from Mrs Bob with even greater discounted dollars of the premium of the life policy! Gee, I'm thinking Joe is making out like a bandit here while Mrs Bob is paying dearly from this arrangement.

Yea, if I was a spouse of a business owner, I hope my spouse wouldn't hate me enough to do this to me!

You think Bob hates his wife because he assures her that should he not survive Mrs. Bob will get Bob's value of the business in cash within weeks, even days, of his demise?

Mrs. Bob is getting the value of her husband's share of the business almost immediatley upon Bob's passing via life insurance. And Mr. Bob's partner gets the business. I don't see how you can construe that as bad in any way, shape or form. Mrs. Bob doesn't have to get involved in a business she knows nothing about. Instead she gets cash to live out her life with. Mr. Bob's partner doesn't have to worry about dealing with Mrs. Bob who knows nothing about the business. Everybody is happy. I think everyone would rather have Bob around but since he isn't immediate cash is the next best thing.

If they wait for Bob's partner to buy Mrs. Bob out after Bob dies, chances are Mrs. Bob is going to get installments that may or may not come regularily. It will always be a struggle for Mrs. Bob to collect installments. Thus her income will be somewhat irregular. And it will be a struggle for Bob's partner to come up with installments to pay off Mrs. Bob because she isn't helping run the business, she is just collecting money from it. How happy would anybody be to pay someone an income that isn't working?

Now in some situations a business owner dies within a few months of executing an agreement. Is that a good deal? Who knows? It is just a function of life insurance. Basic underwriting here. If Joe Sixpack dies within 6 months of buying a life insurance policy his wife makes out like a bandit as well. $1000 worth of premium and Mrs. Sixpack gets a check for half a million dollars. Except that she doesn't have Mr. Sixpack around anymore.

 

[arnguy]

James, I am a former IRS Revenue Officer.:bump:

 

[James]

James, I am a former IRS Revenue Officer.:bump:

Okay, knew we had one! Glad my memory is totally gone!

 

[James]

You think Bob hates his wife because he assures her that should he not survive Mrs. Bob will get Bob's value of the business in cash within weeks, even days, of his demise?

Mrs. Bob is getting the value of her husband's share of the business almost immediatley upon Bob's passing via life insurance. And Mr. Bob's partner gets the business. I don't see how you can construe that as bad in any way, shape or form. Mrs. Bob doesn't have to get involved in a business she knows nothing about. Instead she gets cash to live out her life with. Mr. Bob's partner doesn't have to worry about dealing with Mrs. Bob who knows nothing about the business. Everybody is happy. I think everyone would rather have Bob around but since he isn't immediate cash is the next best thing.

If they wait for Bob's partner to buy Mrs. Bob out after Bob dies, chances are Mrs. Bob is going to get installments that may or may not come regularily. It will always be a struggle for Mrs. Bob to collect installments. Thus her income will be somewhat irregular. And it will be a struggle for Bob's partner to come up with installments to pay off Mrs. Bob because she isn't helping run the business, she is just collecting money from it. How happy would anybody be to pay someone an income that isn't working?

Now in some situations a business owner dies within a few months of executing an agreement. Is that a good deal? Who knows? It is just a function of life insurance. Basic underwriting here. If Joe Sixpack dies within 6 months of buying a life insurance policy his wife makes out like a bandit as well. $1000 worth of premium and Mrs. Sixpack gets a check for half a million dollars. Except that she doesn't have Mr. Sixpack around anymore.

Way to many assumptions for me to deal with, I'm happy my memory is still here to a degree but, I really don't want to hurt my mind in dealing with so many assumptions.

Yet I'll give you this, "IF" all the assumptions you are using are correct then I'll agree to a degree to agree. Yet, the word "IF" to some is consider the largest word in the dictionary, or second to "BUT".

 

[wcShaver]

Thanks to all!

I've had a chance, finally, to catch up on all of the posts for this thread, and they are great!

Thanks to everyone who responded. This is all very valuable information.

wcShaver