How to preserve your life's work

You've spent a lifetime building your business. Take a moment to help make sure than your hard work will survive the death of you or one of your partners.

As the owner of a closely-held business, much of your wealth is probably tied up in the business. While returning earned income back into the business helps finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family members also may encounter liabilities that become payable upon your death.*  They may also face the potential of decreased business earnings, due to your absence.

There are ways to overcome these liquidity problems. Business-oriented planning tools can help reduce estate taxes and make the best use of the cash available.*  The most common business estate-planning tools are buy-sell agreements. Section 303 stock redemptions, Section 6166 estate tax deferrals and the qualified family-owned business exclusion.*  Business-owned life insurance can be used to fund each of these planning methods.


Buy-Sell Agreements

Buy-sell agreements can establish the value of your business for estate-tax purposes and improve your estate's liquidity by assuring a ready market for your business upon your death.* These agreements also protect business partners from sharing ownership with a deceased stockholder's family.

There are two main forms of buy-sell agreements: cross-purchase and stock redemption. In an insurance-funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner's stock from his or her estate.*

In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. Here the business is the owner and beneficiary of life insurance policies on each shareholder. A partnership looking for a business continuation strategy may use a similar arrangement called an entity purchase.

A buy-sell agreement that is funded with life insurance can benefit:

Your Family:

  • Prevent conflict with surviving owners
  • Ensure that your family receives a fair price for your business
  • Set the value of your business for estate-tax purposes*
  • Provide needed cash

Your Business

  • Keep new and/or unwanted owners out of the business
  • Prevent disputes
  • Ensure continuity and orderly transfer of ownership
  • Provide tax-free cash to purchase stock*


  • Difficult to use insurance proceeds for personal retirement
  • Not safe from personal creditors
  • Administration can be complex with more than two or three business owners.

Section 303 Redemptions

Section 303 of the Internal Revenue Code gives your estate a one-time opportunity to remove cash or other property from your business, at little or no tax cost, through a partial redemption of your stock. This can provide the liquidity your survivors need to pay funeral costs, estate and administrative expenses, and state and federal death taxes.*

To be eligible for a Section 303 redemption, the stock value must exceed 35 percent of your estate. The maximum amount that can be paid under such plan equals the total amount of the federal estate tax, state death taxes and funeral and administrative expenses. Corporate-owned life insurance can be used to fund the redemption. Under this arrangement, your business purchases an insurance policy on your life and at your death uses the tax-free proceeds to buy enough stock from your estate to cover death expenses and taxes.*


Section 6166

An estate tax burden can force the liquidation of a closely-held business. Internal Revenue Code Section 6166 was designed to prevent this liquidation. If the business interest constitutes more than 35 percent of your adjusted gross estate, under Section 6166 the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of your death.*

There are a number of requirements you'd have to meet to be eligible for the Section 6166 extension. If your estate qualifies, life insurance offers a way to pay these installments.


Qualified Family-Owned Business Exclusion

If your business qualifies as "family owned" you may be able to exclude part of it from estate taxation. Your business qualifies as family owned if the business comprises more than 50% of your total estate and you pass the estate on to a "qualified heir". A qualified heir is generally defined as a spouse, child, grandchild or other descendent. Your heirs, however, should realize that they have to hang onto the business for at least 10 years following such an estate transfer. If they don't, they may have to pay the full estate taxes that were avoided. Life insurance can provide your heirs with the cash necessary to pay estate taxes whether or not you qualify for this exclusion.*


Business Valuation for Estate Planning

No matter what technique you select for your company, determining the value of the business is a key step in the estate planning process. Why? First, in the case of a buy-sell agreement, you need to know the value of the business to determine the price and fund the agreement. Second, because the business is part of your estate, the valuation is needed to estimate the estate taxes; this helps you calculate the cash or liquidity needed to administer the estate. Finally, the value of the business must be reported on the estate tax return when the owner dies.*

Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods

Please keep in mind that the primary reason to purchase a life insurance product is the death benefit.

The life insurance death benefit is income tax free to the business if the business, at the time of purchase, had met the requirements of Internal Revenue Code Section 101(j) including providing the insured with advance notice, obtaining the insured's prior consent to be insured, and meeting insured's executive income requirements.


This material may contain a general analysis of federal tax issues. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.