39. Split Dollar in Buy-Sell Agreements

In the right situation, split-dollar life insurance can be useful in helping company stockholders finance a business buyout agreement. Here's how it might work. The stockholders enter into a stock redemption
agreement with the corporation. Each stockholder also enters into a split-dollar arrangement with the corporation for insurance on the other stockholder. The corporation pays that part of the premiums equal to the
increase in cash value of each policy and owns only the cash value. The balance of the premiums are paid by the stockholders.

What we have, then, is a combination stock redemption and cross-purchase agreement financed by split-dollar insurance. After the first or second year, the lion's share of each split-dollar premium will be covered by the increase in cash values. Since this portion is owned by the corporation, only a small portion of the annual premium should be taxable income to each of the stockholders. Each stockholder-beneficiary will be taxed on that portion of the premium that pays for one-year term insurance protection minus the portion of the premiums paid by such stockholder for
the year.

When one of the stockholders dies, the corporation will use the cash values of both policies to redeem as much stock of the deceased stockholder as it can. The surviving stockholder will use the balance of the proceeds he receives to purchase the rest of the deceased stockholder's shares. The deceased shareholder’s estate will include the value of the remaining insurance on the survivor's life.

Tax reference verification 1-800-829-1040

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