Vol 5 No 8		November 2003

Katt & Company is a fee-only life insurance advising firm. We work with clients throughout the U.S. - primarily by phone, mail, email and telecopy. Typically, we assist clients buying life insurance and those who need existing policies reviewed and managed. We also assist clients with disability income and long term care insurance. The June 2002 Forbes magazine, and a July 16, 2003 Wall Street Journal article, name Peter Katt as one of only four nationally recognized advisors. The Forbes article states that, "…advisers are well worth the money… These savants are working for no one but you…" For references please contact us.

Insured Buy-Sell Agreements for 100% Owners

About once a year we see business continuation planning for a new client (lets call him Don) who owns 100% of his business and has a buy-sell agreement in favor of certain key employees that is funded with life insurance. Sometimes the insurance is owned by the business other times it is owned by the employees. Either way the 100% owner is directly or indirectly paying the insurance costs. Don's motivations are to see that his family doesn't have to hassle with the business and that the business continues on for his employees in the event of his demise. Usually we see term insurance being used with Don being relatively young. The term insurance cost of doing this isn't much and Don's chances of dying are very slim. However, this arrangement has several significant negatives. First, such buy-sell planning doesn't add any asset value to Don's family because he is exchanging the insurance benefits for his business' value. Second, it creates an ownership expectation on the part of the involved employees that should probably never have been created in the first place. Our experience has been that after a full discussion of the issues our clients terminate this buy-sell arrangement in favor of having life insurance for their family and estate's need owned personally or by an irrevocable trust with special written instructions given to his close advisors to quickly work with a named key employee to assist with the sale of the business either to an outside entity or to employees if they can arrange financing. This alternative planning adds asset value for the family and removes any inappropriate expectations for employees who, sans an insured buy-sell in their favor, wouldn't have ownership notions in the first place.

Regarding entity buy-sell agreements, in case you haven't already noticed, a new accounting standard (FAS 150) states that if a business must buy back the shares of a shareholder at death this obligation is to be treated as a liability on the balance sheet and cannot be offset with the use of life insurance. I suggest you check with such services as http://www.leimbergservices.com for details.

Also, please see my April and August 1997 AAII Journal columns, The Role of Insurance in Continuation Planning of Closely-Held Businesses, and The Role of Insurance in Buy-Sell Planning for Businesses: Part 2, that deal with the role of life insurance in business continuation planning for closely held businesses.