Insurance converts an obligation that arises at an unpredictable moment into a funded one.
Buy-sell funding. Policies on each owner’s life sized to the buyout price under the agreement. Two structures: cross-purchase, where owners own policies on each other, and entity redemption, where the company owns them.
Cross-purchase gives the surviving owners a basis step-up in the purchased interest, which reduces tax on a later sale. It becomes unwieldy with more than a few owners because of the number of policies, which trusteed arrangements address.
Entity redemption is administratively simple, and the surviving owners receive no basis increase. Corporate-owned policies can create alternative minimum tax exposure for some entities, and the proceeds are exposed to corporate creditors.
Notice and consent requirements must be satisfied before an employer-owned policy is issued, or the proceeds lose their tax-free character.
Disability buyout policies address the more likely event, with definitions of disability and elimination periods that must match the buy-sell trigger.
Key person coverage payable to the company to offset the loss of a principal and to fund a search.
Review. Coverage amounts should be revisited when the valuation changes, and policies confirmed in force annually.