Life insurance is surely one of the most versatile and important tools in estate planning. Not only can it provide for a family’s welfare in the event of the untimely death of the breadwinner, but insurance proceeds also can pay estate taxes, leaving legacies intact for the heirs.
The drawback to using life insurance to pay estate taxes is that the insurance death benefit itself is included in the estate and, therefore, increases the amount of tax the estate must pay.
Fortunately, this situation is only true if the decedent were the owner of the insurance policy. When the policy belongs to a beneficiary or a third party, its proceeds never become part of the estate. To accomplish this, the decedent must have surrendered every vestige of ownership at least three years prior to the date of death.
This can be done simply by turning the policy over to a trusted person. Annual gifts can be made to that person to cover the premiums. However, the new owner will control the policy. He or she can change beneficiaries, neglect to make premium payments, even surrender the policy for its cash value.
Insurance can provide for the survival of a closely held business. Suppose that one child works in the business and is best qualified to run it, but the business is the estate’s major asset. An insurance policy can provide fair shares to the other heirs, leaving the business child to manage the enterprise without interference.

Insuring two (or more) lives
When an estate passes to a husband or wife, no tax is due. However, upon the survivor’s death, the IRS may claim a substantial share of large estates. Married couples can provide for payment of estate taxes most economically with second-to-die, or survivorship, life insur¬ance. Because the death benefit is payable only on the death of the second spouse, this type of policy carries a lower premium than a single policy—and much lower than two individual policies. Savings of 50% or more may be possible, depending on age and insurability.
The insurance industry also offers first-to-die policies, which cover two or more lives but pay only upon the first death. A working husband and wife can use this type of coverage to ensure that money to replace lost earnings will be available to the survivor and the children.
First-to-die insurance also can be useful in protecting a family business or a business partnership. It can supply the extra cash needed for a business to recover from the effects of a key member’s death. Or the insurance can provide partners or family members with the money to complete a buy-sell agreement.

Choosing a policy
Today life insurance is offered in several different packages, each with its own advantages and disadvantages. The table here summarizes the features of the major types. Premiums can vary widely—as can the solvency of insurance companies. So it pays to shop, and to ask questions.

Insuring a business
In addition to life insurance, a business owner or professional needs to insure against a wide range of risks. Of course, the needs of each business are unique. Coverages should be reviewed periodically to ensure that continuation of the business is not at risk.
Property insurance protects against fire and smoke damage, but owners may also need to consider the possibility of losses from floods, hurricanes, earthquakes, building collapse and other unforeseen events. Such disasters usually bring extra costs—such as cleanup, storage, rentals and repairs—that can be covered by insurance. And policies are available to cover the cost of lost business.
Liability insurance can simply cover persons injured on the business premises or by its employees. Professional liability insurance, also known as “errors and omissions” or “malpractice” insurance, is available for architects and engineers as well as doctors, lawyers, accountants, brokers and other licensed professionals. And an umbrella policy can cover large liabilities after the basic coverage maxes out.
And that just may be the beginning of the insurance needs of a going business. Insurance may cover employee bonding and employee dishonesty. Workers’ compensation is mandatory, and health insurance may be essential in attracting and retaining qualified employees. Now it’s even possible to insure commercial receivables.
Many insurance companies also offer a special combined policy known as a business owner’s policy (BOP). Although not available to certain types of business, such as auto repair shops and restaurants, BOPs can offer small businesses comprehensive protection at a price well below the cost of buying the most important coverages separately.

The Financial Industry Regulatory Authority (FINRA), formerly the National Association of Security Dealers, continues to warn investors and consumers about “phishing,” a scam that uses spam e-mail to lure investors into revealing bank or brokerage account information, passwords or PINs, or other types of confidential information. Often the e-mails falsely claim to be from brokerage firms, banks or other services that investors are likely to use.
According to some estimates, scam artists are able to convince up to 5% of e-mail recipients to respond to them. And, alarmingly, the number and sophistication of phishing scams are continuing to increase dramatically, according to the “anti-phishing work group” (www.antiphishing.org).

Here’s what to look for
Scam e-mails may use the names of real people, or legitimate-looking addresses, authentic-looking logos or graphics, links to pages of a bona fide Web site and official-looking fine print or references to laws. This seeming authenticity lures the investor into providing sensitive information, usually by requesting that he or she send a reply e-mail or click on a link to a Web site that mimics a legitimate site.
To lower an investor’s guard, he or she may be told that: an account will be closed unless information is updated; the investor’s identity must be verified because the account is being used by a third party in violation of the law; because of a technical update, the account must be reactivated; or recent law changes require users to identify themselves.

How to protect yourself
FINRA offers several tips, developed by the Federal Trade Commission, to help prevent you from becoming a victim of phishing or other online identity theft:
• If you receive an e-mail that warns you, with little or no notice, that an account of yours will be shut down unless you reconfirm your billing information, do not reply or click on the link in the e-mail. Instead, contact the company cited in the e-mail using a telephone number or Web site address that you know to be genuine.
• Avoid e-mailing personal and financial information. Before submitting financial information through a Web site, look for the “lock” icon on the browser’s status bar. It signals that your information is secure during transmission.
• Review credit card and bank account statements as soon as you receive them in order to determine whether there are any unauthorized charges. If your statement is late by more than a few days, call your credit card company or bank to confirm your billing address and account balances.
• Keep your personal and financial information secure online. Make certain that your computer system is up to date with the latest security patches and use antivirus and spyware detection software. Firewall software should thwart intruders from getting access to your PC over a network. Never download software or files from an unknown source.
• Report suspicious activity to the FTC. Send the actual spam to uce@ftc.gov. If you believe that you’ve been scammed, file your complaint at www.ftc.gov, and then visit the FTC’s Identity Theft Web site (www.ftc.gov/idtheft) to learn how to minimize your risk of damage from identity theft.
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You can find more information about phishing or other identity-theft scams by reviewing the investor alerts available at: http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/index.htm.

When you own a company, by yourself or together with one or more partners, you pour heart and soul into making it a success. Indeed, the process of bringing a business into existence and then nurturing it and building upon its success is so engrossing and exhilarating that it’s easy to lose sight of one sobering fact: You and each of your co-owners (partners or shareholders) one day will take leave of the company. It may be by retirement, disability or death. Someone may feel the need to move on. A partner may be tempted by a third party’s offer for his or her share of the enterprise.
Potentially, any of these situations can throw a going business and/or the family of a deceased owner into chaos. A family may be forced to sell its share to cover taxes on the estate—if it can find a willing buyer. Remaining partners may not be able to get along with an interloper who comes into the business through purchase or inheritance. In an S corporation, the new shareholder may not be of a class eligible to hold such shares, thus forcing a reorganization.
A versatile tool
Buy-sell agreements provide a powerful business succession tool that owners of small-to-medium-sized companies can use to address any or all of these eventualities. A form of shareholder agreement, the buy-sell agreement is a contract spelling out what will happen to the equity of a departing shareholder when a “triggering” event occurs.
Buy-sell agreements will generally fall into one of two categories:
• In a cross-purchase agreement, the shares or interest of the departing partner are to be bought by the surviving or remaining partners. In a sole proprietorship, the designated purchaser would be the owner’s chosen successor, whether a family member involved in the business or a key employee vital to its continuation.
• In a stock redemption plan, the equity or shares are bought and retired by the corporation or partnership, thereby increasing the remaining shareholders’ share of the company’s equity.
The choice between these options will depend on the company’s structure and the resources available to fund the purchase. Agreements may set varying terms for different triggering events. For example, a lower price may be paid to a partner leaving to set up a competing business. Purchases might be mandatory upon the death or disability of a partner, whereas voluntary or forced withdrawals might give the business only “the right of first refusal”—to match a first legitimate outside offer, if it so chooses.
Funding choices
Often life insurance and, less frequently, disability insurance are used to fund buy-sell agreements. The contractual buyer purchases a policy on the prospective seller’s life. The proceeds are earmarked to purchase the business interest from the heirs of the deceased owner, and the cash value is available to fund purchases in other situations. In cross-purchase agreements each owner needs to have a policy on the life of each of the other owners.
Because this process can be quite cumbersome when there are multiple owners, a stock redemption plan may be more workable. In that case, the business owns and funds a single policy on each owner’s life. Life insurance cash value is carried as an asset on the corporate balance sheet and will not be considered an excess accumulation of earnings if it does not exceed the reasonable needs of the business.
The hard part
Placing a value on a closely held business can be a challenge. Placing a future value is nigh on impossible. For this reason it may be best to specify a reasonable method that will be used to determine the price to be paid, or to recalculate the price periodically.
Methods that may be appropriate, depending on the nature of the business, can be to: capitalize average earnings over a period of years; calculate the loan amount that the company’s cash flow will support; total the tangible assets on the balance sheet; place a value on the business’ intangible assets (often its customer base); or simply apply an industry rule of thumb. Any method specified in a buy-sell arrangement that represents a true arm’s length valuation will be binding on the IRS for estate tax purposes.
The payoff
A well-structured buy-sell agreement can provide a panoply of benefits:
• ensuring an orderly transfer of business interests, preventing forced liquidation;
• protecting the heirs of minority owners who otherwise might end up with a holding of restricted, non-dividend-paying stock;
• preventing a sale to outsiders or inheritance by someone not active in the business;
• persuading a key employee to remain in the business;
• establishing the value of a deceased owner’s shares for estate tax purposes.
If you run a business, we’re always ready to work with you and your advisers to develop buy-sell agreements and all other financial services available to help your enterprise thrive.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

What would you do if you suddenly came into a lot of money? Such as, for example, winning a $144 million Powerball jackpot? That was the question faced by a long-time Washington, D.C., resident who bought a single $1 lottery ticket with the numbers randomly selected.

An early decision was to take the lump sum, not the annuity, perhaps because he was 82 years old. That reduced the jackpot to $79.6 million. The man’s attorney estimates that the sum will be reduced further by income taxes to $60 million.

Still, that’s a lot of money, and a lot of responsibility. This individual decided that he wanted to remain anonymous. He hired an attorney and created a limited liability company to receive the proceeds, which then will pass to three trusts. One trust will provide for the education of the man’s ten children and 47 grandchildren. A second trust will meet their health care expenses. The third and final trust is for charitable giving.

Lottery officials reportedly were very disappointed that they were not able to present the big check to the big winner. On the back of the lottery ticket is fine print that asserts the owner of the winning ticket grants the lottery the right to use a photograph, together with the winner’s name and residence, for publicity purposes. Creation of an entity to receive the proceeds is legal to circumvent this requirement.

Why would someone with sudden wealth want to preserve anonymity? Because he wanted to preserve a normal life. The winner’s lawyer said that his office received 80 telephone calls just the first morning after it was revealed that his client had won the jackpot. Most were solicitations, requests for charitable gifts. One would have to take the telephone off the hook, and perhaps get an unlisted number to boot, to avoid such an assault.
The identity of the trustee was not mentioned in the press reports. Choosing the right trustee could help with the professional management of such a game-changing sum of money.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.