2. Business Planning Techniques
Plan Objective Payor Owner Beneficiary
Buy-sell
cross
purchase
Disposalofbusinessinterest
bytransferringownershipto
survivingco-ownerswho
continuebusiness.
Eachpartnerorstockholderpays
premiumsforpolicyonthelifeof
partner(s)orco-stockholder(s).
Eachpartnerorstockholderowns
policyonthelifeofpartner(s)or
co-stockholder(s).
Eachpartnerorstockholderis
beneficiaryofthepolicythat
partyownsonlifeofpartner(s)
orco-stockholder(s);proceeds
usedtobuyinterestfrom
deceasedowner’sestate.
Buy-sell
stock
redemption
or entity
purchase
Disposalofbusinessinterest
byhavingbusinesspurchase
deceased’sinterest.
Business Business Business–proceedsusedto
buyinterestfromdeceased
owner’sestate.
Partial stock
redemption
underSection
303 of the
Internal
Revenue
Code
Transferownershipofclose
corporationtoheirsbutalso
convertsomesharestocash
forestateclearancecosts.
Corporation Corporation Corporation–proceedsusedto
purchasestockfromestateof
deceasedstockholderin
amountlimitedtoestate
settlementcosts.
Keyemployee
life insurance
Provideprotectiontooffset
financiallossestoabusinessdue
todeathofvaluableemployee.
Business Business Business–proceedsoffset
reducedprofitsandhelppay
forreplacementuponkey
employee’sdeath.
Disability
income for
key
employees
(sick pay
plan)
Providesalarycontinuation
planforselectedemployee
duringperiodofdisability.
Business Coveredemployee Coveredemployee–benefits
offsetsalarylostwhileunable
towork.
2
The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not
authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved
in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
3. Business Employee Deceased’s Family Federal Estate Tax Aspects
Premiumsnotdeductible.Proceeds
nottaxable.
“Step-up”inbasisusuallyapplies.
Ifpurchasepricedoesnotexceed
stepped-upbasis,thereisnotax.
Thevalueofthedecedent’s
businessinterestisincludedin
hisorherestate.
Premiumsnotdeductible–proceeds
nottaxable(alternativeminimumtax
mayapply).
“Step-up”inbasisusuallyapplies.
Ifpurchasepricedoesnotexceed
stepped-upbasis,thereisnotax.
Thevalueofthedecedent’s
businessinterestisincludedin
hisorherestate.
Premiumsnotdeductible–proceeds
nottaxable(alternativeminimumtax
mayapply).
“Step-up”inbasisusuallyapplies.
Ifpurchasepricedoesnotexceed
stepped-upbasis,thereisnotax.
Thevalueofthedecedent’s
businessinterestisincludedin
hisorherestate.
Premiumsnotdeductible–proceeds
nottaxable(alternativeminimumtax
mayapply).
IRC101(j)rulesrequiredfordeath
benefittobeincometaxfree:
-Employermustgivenotice
-Employeemustconsent
inwriting
-Employeemustmeet
statusrequirement*
-Employermustfilean
annualForm8925
Consideredarelevantfactorin
valuingsharesofstockifdeceased
wasanowner.
Premiumsdeductible. Employer-paidpremiumsneednotbe
includedingrossincome.Benefits
thentaxabletoemployee.
Iftheemployerpaysthepremiumbut
theemployer-paidpremiumsare
includedintheemployee’staxable
income(i.e.,includedinW-2wages),
thenitisconsideredemployee-paid,
andbenefitswillbereceivedincome
tax-free.
Federal Income
Tax Aspects
3
*
Insured was employee at any time during 12 months before death or at time of issue, insured was: a director, 5% or greater owner, highly compensated,
one of 5 highest paid officers, among the highest paid 35% of all employees.
Either employment status requirement must be met, not both.
4. 4
Business Planning Techniques
Plan Objective Payor Owner Beneficiary
Split Dollar
(Conventional
non-equity)
Retentionofkeyselected
employeebyhelpingemployee
purchaselifeinsurance.
Business Businessorinsuredorthirdparty
(i.e.,trust)
Businessreceivesgreaterof
premiumcostsorcashvalue–
balancetoemployee’sbeneficiary.
Split Dollar loan
arrangement
Retentionofkeyselected
employeebyhelpingemployee
purchaselifeinsurance.
Businesspaysallorpartof
premiumpayment
Insuredorthirdparty(i.e.,trust) Businessinterestinpolicyequal
toitscumulativepremiums.
Nonqualified
deferred
compensation
Retentionofkeyexecutiveby
deferringtaxableincomeand/or
providingsalarycontinuationplan.
Business Business Business–proceedsusedtofund
keyexecutive’ssalary
continuationplan.
Section 162
executive
bonus plan
Retentionofkeyselected
employeebyprovidingdeathand/
orretirementbenefits.
Business Coveredemployee Asdesignatedby
coveredemployee.
Pension plan Provideretirementbenefits
foremployees,including
stockholder-employees,
onatax-favoredbasis.
Business Trustee–vestingschedule
determinescoveredemployee’s
ownershiprights.
Usuallytrusteeofplanwith
beneficiaryundertheplanas
designatedbycoveredemployee,
subjecttoqualifiedjointand
survivorandpre-retirement
survivorannuityrequirements.
Profit sharing
plan
Provideforemployees,including
stockholder-employees,toshare
intheprofitsofthebusinessona
tax-favoredbasis.
Business Trustee–vestingschedule
determinescoveredemployee’s
ownershiprights.
Usuallytrusteeofplanwith
beneficiaryundertheplanas
designatedbycoveredemployee,
subjecttoqualifiedjointand
survivorandpre-retirement
survivorannuityrequirements.
