Masonry Magazine August 1979 Page. 26
ESTATE PLANNING
continued from page 25
One-third of the business value is withdrawn by the executor at any time during the 15-year period, the full face value of the loan becomes due. But the major disadvantage is that the estate is prevented from making any distributions. Children could be dead and buried before their parent's estate is closed. And legal cost over such a long period could erode the estate considerably. So the 15-year pay-out should not be relied upon.
"Key Man" Life Insurance Policies
Let's now discuss another approach. Corporations commonly acquire "key man" life insurance policies on individual employees. In closely-held corporations these policies not only compensate the corporation for the loss of the services of this important individual, they also protect the corporation from forced liquidation to settle the estate of a majority or sole stockholder. Since the corporation owns the policy, the estate need not worry about "incidents of ownership." And the corporation may enter into a "redemption agreement" with the estate, whereby at the death of the individual the corporation would acquire shares from the estate using the key man policy proceeds to finance the purchase.
Another approach to protecting the interests of the closely-held corporation involves what is known as a "cross-purchase agreement." This doesn't apply to a situation where there is a sole shareholder, but it would apply, for example, to two brothers in partnership or to a small group of co-shareholders. Under this "cross-purchase agreement" each principal enters into a buy-sell agreement which provides that on the death of one party, the remaining parties would purchase, as individuals, the stock interest from the deceased's estate. Again, each party would cross-insure each other to finance the eventual purchase. Life insurance is usually the best device to finance such an arrangement since it uses a "discounted dollar approach" in which the premiums paid are less than the face amount of the policy.
The cross-purchase agreement also permits the estate owner to know exactly what will happen to his business interests upon his death. Such an agreement is more binding than a will, and as we have seen, it can resolve one of the most vital stumbling blocks to the speedy estate settlement, the valuation of a closely-held corporation.
Marital Deduction Advantage
Let's move on to another technique which is used to reduce estate costs. For the protection of a surviving spouse, the Internal Revenue Code provides that $250.000 or one-half of the adjusted gross, whichever is larger, may be passed from husband to wife, assuming the husband dies first, free of any federal estate taxation. If the order of death is reversed, the wife can pass this amount to her husband without taxation. This provision along with permissible tax credits virtually eliminates any federal estate taxation for an estate less than $425,000.
In order to take advantage of the marital deduction, three basic requirements must be met:
* At the date of death, the individual must have a surviving spouse:
* The property must actually pass from the deceased to the surviving spouse:
* It must pass to the surviving spouse in such a way that it will have to be included in the survivor's gross estate.
Assuming we have a gross estate of one million dollars, the first $500.000 escapes federal estate taxation at the first
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26 MASONRY/AUGUST, 1979