Business Succession Planning and the Irrevocable Life Insurance Trust: Liquidity to Preserve Your Business for Future Generations” by Cara F. Dwyer
After decades of hard work, sweat and tears, you are the proud owner of a successful family business. Your dream is to have the business passed down from generation to generation. The seamless succession of your business to future generations is at risk in either of the following scenarios:
- Business is booming. You have amassed significant assets, but they are largely illiquid business assets such as inventory and real estate. If your estate is saddled with a heavy estate tax burden and you have limited liquid assets to satisfy it, your family could be forced to sell the business to pay the taxes.
- All of your children have expressed an interest in the perpetual continuation of the family business for generations to come. One of them has a change of heart after your death, however, and would prefer to receive cash, instead of a share of the business, in satisfaction of his or her share of your estate. If there are not ample non-business assets to fund the child’s share, he or she could force the sale of the business to reap his or her inheritance.
The scenarios above end in the demise of your dream. Despite all your years of hard work, it may be necessary to sell your business in order to pay estate taxes or to equalize your assets among your children. An Irrevocable Life
Insurance Trust, also known by its popular acronym, ILIT, is an estate planning technique that should be considered in order to avoid that result.
An ILIT is an irrevocable trust that owns a life insurance policy insuring your life. If properly established and administered, the death proceeds paid to the ILIT will not be included in your estate for estate tax purposes and 100% of the proceeds are then available to provide needed liquidity upon your death. An ILIT can be a valuable component of your business succession planning.
As with most planning tools, you need to consider the drawbacks of an ILIT as well. As the name implies, an ILIT is irrevocable. Once you have created and funded it, you cannot terminate it and you cannot reach assets you have transferred to it. Furthermore, you cannot have any “incidents of ownership” in the life insurance policy. Thus, you cannot own the policy. If you own the policy, its value will be added to your estate upon your death, which could perpetuate an estate tax problem. Finally, an ILIT requires some attention to detail in its funding and management.
All your hard work should not end in vain. Although you cannot control all the factors that can affect the succession of your business upon your death, business succession planning, including consideration of the use of an ILIT, is something that you can and should do in order to improve the chances of preserving your business for future generations.
Schedule an appointment today with the Estate Planning Practice Group of CECB. We have over 150 years of combined private practice experience in estate and business succession planning and we are ready to go to work for you.