Wednesday, June 29, 2011

"Whole Life Policy As Tax Advantage "

Published in InsuranceNewsNet by ProQuest Information and Learning Company


One of the most controversial topics in the financial planning world is the use of life insurance
as a way to accumulate cash savings. Whole life insurance has been sold by agents for
decades as the lowest long-term cost of insurance along with a forced savings account. The
other side of this argument is to buy term insurance, and invest the difference.
I once favored the "buy term and invest the difference" approach. But I have seen very few
people who have stuck with the program and actually built that robust investment account.
Life insurance is primarily a tool to have a lump sum of cash at someone's death to provide for
loved ones. For most, the death benefit is the primary motivator. But for many wealthy
investors, accumulating cash inside a whole life policy has great appeal.
Wealthy, for purposes of this discussion, means that someone has more money than they
need. Their basic needs, fun activities and legacy plans are amply funded by their nest egg and
overall net worth. Their cash flow is stable and consistently well in excess of their cost of living.
If this profile does not fit you, then using life insurance as a savings vehicle should be a very
low priority for you.
Why is accumulating cash with life insurance so popular with the wealthy? First is the reality
that their next dollar of savings is not likely ever to be needed. It is frequently excess savings
that is likely to end up in the hands of the next generation.
Next is taxation. Traditional cash savings generate annual interest that is taxable. The interest
accumulating inside a whole life insurance policy is not taxed while accumulating. If the owner
of the contract dies and never gets to the cash accumulation, it all passes income-tax free to
the next generation.
Net returns are also a factor. Today's traditional savings vehicles have a very low rate of
return. The cash buildup inside a whole life policy may be higher than what you may get from
a CD. The potential returns from the life policy are twofold. One is the eventual death benefit,
which a CD doesn't offer. The second is the actual interest rate on the cash value buildup.
To properly take this approach, the owner should maximize contributions to the contract. Cash
accumulations inside whole life policies were such a great deal for tax planning that the IRS
actually limits just how much you can invest inside these contracts. To make it work best as an
accumulation tool, you need to contribute right up to the limit imposed by Uncle Sam.

Wednesday, June 22, 2011

Attention Business Owners:Buy Sell Agreements

White Paper by ING Life Companies: Intended for educational purposes only

Buy-sell and business continuation agreements are important business planning
documents. Because every business owner will voluntarily or involuntarily leave their
business someday, these agreements are critical in determining both the ownership and
decision-making structure of the business after an owner leaves. A smooth transition of
business ownership is important for both the remaining owners and the departing owner
and his/her family. Owners who don’t have a buy-sell plan in place before it is needed
may create difficult problems for their families and co-owners.
Just as it is important to have a binding agreement, it is equally important that funds are
available to carry out the promises made in the agreement. Even a perfectly drafted
buy-sell agreement can’t be carried out unless the buyer(s) have the money to follow
through on his/her/their purchase obligation. Ownership transitions won’t happen
without a concrete plan for financing the agreement. This publication will offer a new
strategy for funding ownership transfers necessitated by an owner’s death.
The Importance of Life Insurance
Most buy-sell agreements include death as one of the triggering events. When this is the
case, an owner’s death activates the legal obligations to buy and sell the deceased
owner’s interest. Because death is nearly always a triggering event, life insurance policies
are often used in the funding of the agreement. Some potential advantages life insurance
provides include:
(1) The policy death benefit is generally payable in full as soon as the policy has
been issued and a premium has been paid, even if the insured owner dies
shortly thereafter.
(2) Policy death benefits may be paid relatively quickly after proof of death so the
buyer will have some or all of the funds necessary for the purchase.
(3) Policy death benefits are generally paid to the policy beneficiary income tax
free under IRC Section 101.

Common Varieties of Buy-Sell Arrangements
Different varieties of buy-sell arrangements have been developed over time. The two most common
varieties are the entity purchase arrangement (in which the business buys back/redeems a departing
owner’s interest) and the cross purchase arrangement (in which the remaining owners purchase their pro
rata shares of the departing owner’s interest). Both arrangements have their respective potential
advantages and disadvantages.
Who Owns the Policies?
Nearly all buy-sell agreements that use life insurance as a funding mechanism have one thing in
common: The insured business owners do not own the life insurance policies that insure their
lives. In an entity purchase arrangement the business typically owns the policies. In a cross purchase
arrangement the other owners or another entity (e.g. a trust or a general partnership) own the policies.
Life insurance policies can be very valuable assets. The fact that owners don’t own their own life
insurance policies can result in a number of real problems, including:
(1) The person/entity owning the policy may not pay the premiums or may mismanage the policy
so that it is not in force at the insured owner’s death; in these instances no death benefits
are paid.
(2) The insured business owner has no ability to make decisions concerning the policy on his/her life.
(3) “Surplus” death benefits (those in excess of the amount needed to purchase a deceased
owner’s interest) are retained by the policy owner and can’t be used to meet the deceased
owner’s personal financial objectives.
Additional problems may arise when the purchase obligation is triggered before the departing owner’s
death. Many buy-sells are activated when a triggering event occurs prior to an insured owner’s death. In
lifetime buy-outs, there aren’t any policy death benefits available to fund the purchase of the departing
owner’s interest. In these situations:
(1) If an owner’s health deteriorates, he/she may become uninsurable and be unable to purchase
other life insurance coverage.
(2) Even when a departing owner is insurable, the cost of purchasing new coverage could be
prohibitive because of age, health or other conditions.
(3) The insured may not have the legal right to acquire ownership of the policy if he/she leaves
the business before death.
(4) Even when a departing owner does have the right to acquire ownership of the policy(ies)
insuring his/her life, the cost of acquiring those policies could be too high. 3
Some buy-sell agreements have provisions which give departing owners a limited opportunity to acquire
ownership of their policies. For example, when they leave, the agreement may give them the option to
purchase their policy from its current owner for its fair market value. Or, the agreement may give the
purchaser(s) the option to transfer the policy back to the departing owner and treat the policy’s value as
part of their payment.
In some cases these provisions can be helpful. Much of the time, however, they may be ineffective for a
number of reasons. For some policies, it can be difficult to establish their fair market value. Some policies
include various guaranteed features/components which can be hard to value. It is quite possible that the
owners may disagree over a policy’s fair market value. If the insurance company is asked to value it (as it
is sometimes asked to do for the filing of 712 form), the remaining owners may not find the value
acceptable. Other times the policy may not provide much in the way of long term value. For example,
when term life insurance is used to fund a buy-sell agreement, the policy may terminate at a specified
age (e.g. age 70 or age 80) or the premiums may increase substantially after age 65, the approximate
age when many owners hope to retire.
Personal Ownership of Buy-Sell Life Insurance Policies
Despite potential valuation difficulties and disagreements, a departing owner’s life insurance policy is an
asset which could possibly be quite useful in his/her personal retirement planning or wealth transfer
planning. Personal ownership of the policy would give the departing owner control of the death benefit;
he/she could change the beneficiary designation so the death benefits could be used to meet personal
financial objectives.
The “Own Your Own Policy Buy-Sell” strategy is a new alternative for structuring the ownership of life
insurance policies designed to fund either an entity purchase or a cross purchase buy-sell agreement. This
strategy separates the ownership of the life insurance policies from the obligation to purchase created
under the agreement.
Why Is Personal Ownership Rarely Used?
In spite of the potential advantages of personal life insurance ownership to fund buy-sell agreements,
this alternative is not widely used. There are at least three main reasons:
(1) Someone else (either another owner, entity or the business itself) has the legal obligation to
purchase their interest. Because potential purchasers need to make sure they have sufficient
funds to satisfy their purchase obligations under the agreement, it can make sense for them
to own and control the policies.
(2) The entity purchase and cross purchase methods are well known and provide business owners
and their tax and legal advisors with workable and predictable results.4
(3) The transfer for value rule of IRC Section 101. One of the biggest advantages of using life
insurance in buy-sell funding is that policy death benefits are generally federal income tax free
to the policy beneficiary when the insured owner dies. This valuable income tax benefit may
be lost if the business owners own their own policies because they may violate the “transfer
for value rule.” A transfer for value occurs when the owner of a life insurance policy transfers
an interest in the policy to someone else and receives something of value in return. Under IRC
Section 101 a transfer for value isn’t limited to just cash or tangible assets; “value” can also
include a legally enforceable promise which could potentially benefit the transferor (such as a
promise to purchase the owner’s interest). The result of violating the transfer for value rule is
that the policy death benefit less the combined total of the consideration paid and total
premiums paid after the transfer become taxable income to the policy beneficiaries.
Here’s an example to illustrate the point. A and B are each 50% owners of a business. Each
purchases a $1,000,000 life insurance policy on his own life and names the other owner as the
policy beneficiary. Under normal circumstances neither A nor B would name each other as policy
beneficiaries. Reciprocal promises to name each other as beneficiaries can be implied from their
respective actions (or from the terms of the agreement). These reciprocal promises are the “value”
that triggers the transfer for value rule. Thus, if A dies, part or all of the $1,000,000 death benefit
B receives as the beneficiary of A’s policy may be taxable income to B.
The Partnership Exception
Fortunately, it is possible to avoid the harsh income tax consequences of the transfer for value rule. In
IRC Section 101(a)(2) Congress created a number of exceptions to the rule; if one of those exceptions
applies, then it is possible the policy beneficiary may still receive the life insurance death benefits free of
federal income taxes. An exception likely to apply to many buy-sell arrangements is the “partnership
exception.” This exception shields transfers for value from federal income taxes if the transfer is to a
partner of the insured or to a partnership in which the insured is a partner. There are some fine points to
this exception which should be kept in mind, including:
• The partnership must actually be operated as a partnership and not merely exist in form only.
• Members of a limited liability company (LLC) that has elected to be taxed as a partnership are
considered to be “partners” for purposes of the transfer for value rule. (Private Letter Ruling
(PLR) 9625013).
• A transfer for value from a corporation to a partnership in which an insured shareholder is a
partner comes within the exception (PLR 9042023).
• Transfers to shareholders who are partners, even though in an unrelated partnership, fall
within the exception (PLR 9347016, PLR 9045004).
• The transfer of policies insuring shareholders / partners from a corporation to a partnership established
specifically to receive and manage the policies comes within the exception (PLR 9309021). 5
• The IRS has ruled that it will not issue rulings concerning whether or not the exception applies
to a transfer of a policy to an unincorporated organization where substantially all of the
organization’s assets consist or will consist of life insurance policies on the lives of its members
(Rev. Proc. 20063, 2006-1 IRB 122). Thus, it may advisable for the partnership to have other
assets in addition to life insurance policies on the lives of the partners in the partnership.
The “Own Your Own Policy Buy-Sell”
The ability to use the partnership exception to avoid the transfer for value creates an opportunity for a
new type for life insurance-funded buy-sell arrangement—the “Own Your Own Policy (OYOP) Buy-Sell.”
In this approach each owner owns his/her own policy and names other owners (or the business in an
entity purchase agreement) as beneficiaries of part of the death benefit so they have the ability to meet
their purchase obligations. If these owners are in a partner/partnership relationship, the transfer for value
rule should be avoided.
The Own Your Own Policy Buy-Sell—Cross Purchase
Assuming there is valid partnership in place or the business is organized and taxed as an LLC, LLP or a
partnership, these steps may be taken:
(1) The owners enter into a cross purchase arrangement; each owner agrees to purchase his/her
pro rata share of the interest of the other shareholders when they die.
(2) Each owner purchases and pays the premiums on a policy on his/her own life with a face
amount at least as large as the value of his/her interest in the business; an option B death
benefit approach (death benefit payable is the face amount plus premiums paid) may be
appropriate because the insured’s estate will then recover premiums paid into the policy.
(3) Each owner names the other owners as partial beneficiaries of the policy death benefit
according to their pro rata shares of the business; the necessary forms are filed with the
insurance company.
(4) At an insured owner’s death, the death benefits are paid out according to the policy beneficiary
designation; each surviving owner uses his/her share of the death benefit to purchase part of the
deceased owner’s share of the business from his/her estate under the terms of the agreement.
(5) If an owner retires or otherwise leaves the business before death, the remaining owners may
use the cash values in the policies they own on themselves and/or other personal assets to
purchase their respective shares of the departing owner’s interest.
(6) Both the departing and remaining owners file the forms needed to change the beneficiary
designations on all the life insurance policies.6
The Own Your Own Policy Buy-Sell—Stock Redemption
If the business is organized as a C corporation or Subchapter S corporation and the parties wish to
establish an entity purchase or stock redemption buy-sell format, the life insurance policies may still be
owned by the insured owners. Although the partnership exception may not be available to shield the
death benefit from the transfer for value rule, a different exception to this rule may apply—the
corporation exception. This exception can be used when the transfer for value is to a corporation in
which the insured is a shareholder or director. See IRC Section 101(a)(2)(b).
The shareholders could potentially use the Own Your Own Policy strategy to implement a corporate
entity purchase/stock redemption plan with these steps:
(1) The owners and the corporation enter into a stock redemption buy-sell agreement; the
corporation agrees to purchase the interests of shareholders when they leave or die.
(2) Each owner purchases and pays the premiums on a policy on his/her own life with a face
amount at least as large as the value of his/her interest in the business.
(3) Each owner names the corporation as one of the policy beneficiaries as required in the
agreement; the agreement may establish standards for the owners regarding paying
premiums and administering the life insurance policies.
(4) Assignment forms or beneficiary forms are filed with the insurance company.
(5) At an insured owner’s death, the death benefits are paid to the corporation per the
beneficiary designation; the corporation uses these death benefits to redeem the deceased
owner’s stock.
(6) If an owner retires or otherwise leaves the business before death, the corporation will use other
assets to redeem the departing owner’s stock; the beneficiary forms are changed.
Possible Advantages When Owners Own Their Own Policies
Upon close examination, there may be a number of potential advantages when business owners own
their own buy-sell life insurance policies. They include:
(1) Personal Ownership and Control—Each owner makes the decisions concerning his/her
own policy (however, if the agreement sets standards for the policies, each owner would
have to satisfy those standards / requirements).
(2) One Policy Per Owner—There is no need for multiple policies on each owner.
(3) Ability to Include Personal Death Benefit Coverage—An owner may want more death
benefits than the amount needed under the agreement; he/she may decide to increase the
death benefits to accomplish personal protection and wealth transfer planning objectives in
addition to the buy-sell funding objective.7
(4) Each Owner Pays His/Her Own Way—Each owner is responsible for his her own premiums;
younger or healthier owners aren’t forced to pay premiums on older or less healthy owners.
(5) Choose Own Policy and Set Own Premium Level—Within the terms of the agreement,
each owner may decide what type of policy to purchase and how much premium to pay;
they may choose to pay in more than the minimum in order to increase cash values
potentially available to fund the purchase of another owner’s interest or to create
supplemental retirement income for themselves.
(6) Business Dollars For Premiums Potentially Available—The business may assist with paying
premiums; time-tested premium funding techniques like Section 162 bonus plans, split dollar,
and split dollar loans may potentially be used.
(7) The Policies Are Portable—Every owner who leaves the business before death takes the
policy with him; there is no need to attempt to acquire the policy from another owner or
from the business.
(8) Wealth Transfer Planning—After an owner leaves, he/she may reposition the policy to meet
personal needs without going back through the underwriting process to purchase new coverage;
problems with increased premiums and decreased insurability can potentially be avoided.
What Type of Coverage Is Appropriate?
Many business owners consider the need for buy-sell life insurance to be temporary. That’s because they
often expect to sell their interests when they retire (usually between ages 60-70). As a result, they often
use term insurance to fund their purchase obligation. Owners who leave at retirement are usually bought
out with cash, debt (notes) or future earnings (through installment payments) or a combination thereof.
The perception that owners are likely to sell out when they retire encourages the use of term insurance
for buy-sell funding.
In the Own Your Own Policy Buy-Sell structure cash value life insurance may be appropriate because the
policy must be in force at the insured’s death. This means it may have to be in force for a longer period
of time. Owners who like the OYOB approach and want their death benefit coverage to stay in force
after they leave will likely have other uses for the policy. For the policy to be viable for some years after
the owner’s departure, cash value insurance may be needed. Cash value insurance may also be attractive
because of its potential to provide some degree of supplemental income after the owner leaves the
business. The fact that the policy can be used for other purposes after the insured owner’s interest in the
business has been purchased makes cash value life insurance appropriate.8
Managing the Policies
The business owners may be able to combine both their business life insurance planning and their
personal life insurance planning in one personally owned policy. The total death benefit could include
components for buy-sell funding, spousal support, mortgage and personal debt repayment, and estate
liquidity. Of course, the personal portion of the death benefits will be included in their taxable estates for
estate tax purposes. If this is a problem, then it may be possible for the insured owner to establish an
irrevocable life insurance trust (ILIT) and have it own the policy. The portion of the death benefit needed
to fund the buy-sell arrangement could be handled by naming the other owners or the business as
beneficiaries of the ILIT to the extent of ownership in the business. The ILIT could be drafted so that their
status as beneficiaries would end if they die or leave the business before the insured or if the insured ILIT
grantor leaves the business before death.
The insured is responsible for paying policy premiums. He/she can use personal funds or may enter into a
premium sharing arrangement with the business or an outside entity. If it makes financial sense, the
business may be able to supply some of the premium dollars through an economic benefit split dollar
arrangement or a split dollar loan. It is also possible that some assets from the business could be
distributed to the owners as compensation, dividends or (depending on the business’ tax structure) return
of basis.
Wise owners will want to make sure the death benefits they need from another owner’s policy will be
available to help them meet their purchase obligations at the owner’s death. Thus, their status as
beneficiaries entitled to receive a portion of the death benefit must be formalized in the buy-sell
agreement. Their rights can potentially be secured through an irrevocable beneficiary designation, a
written assignment or a policy endorsement. They should consult with their tax and legal advisors to
determine which strategy is best suited to their needs.
Potential Tax Consequences of the OYOP Buy-Sell
The year-to-year income tax treatment of on OYOP buy-sell arrangement is not known with certainty.
The transfer for value issue should only arise when an insured owner dies, not while he/she is alive. It
does not create any year-to-year income tax consequences during an insured’s lifetime. Also, it is possible
to “cure” a transfer for value before the insured’s death by transferring the policy back to the insured.
Are there any year-to-year tax consequences when a policy owner names a business partner as a
temporary beneficiary of all or part of the death benefit of his policy in return for a business partner
doing the same for him?
The authors are not aware of any regulations, rulings or cases which have directly addressed an OYOP
buy-sell arrangement. Because the business is not involved in the arrangement, we believe that income
taxation under the following internal revenue code sections is not applicable:
• Section 162—no compensation from the business
• Section 79—no plan of group insurance
• Section 264—no benefit provided from the business to the owners.9
We believe the income taxation of OYOP arrangements could potentially be viewed in at least three
different ways:
No Taxation
An OYOP arrangement may be compared to how life insurance is sometimes used in divorce/marital
dissolution situations. In addition to alimony and child support, divorce decrees may require one spouse
to purchase and maintain life insurance coverage on his/her life for the benefit of an ex-spouse for a
specified term of years. After the specified term expires, the insured ex-spouse is entitled to do anything
he/she wishes with the policy. When a provision like this is included in a divorce decree, a binding legal
obligation on the part of the ex-spouse to provide life insurance protection is created. If the spouse
receiving the life insurance protection does not own the policy, then the premium payments are not
considered alimony and the value of the life insurance coverage is not taxable income (Temp. Treasury
Reg. 1.71-1T, A-6).
It is possible that the taxation of the temporary year-to-year life insurance protection in an OYOP buy-sell
arrangement could be handled in a similar way. For this argument to be effective, it is likely that the
buy-sell agreement must create an obligation on the part of each owner to provide the other owners
with a specific dollar amount of life insurance death benefits. Accordingly, it may make sense for the
agreement to have a provision requiring each owner to secure life insurance coverage on his/her life and
to name the other owners as beneficiaries for stated amounts or percentages of that coverage.
Taxation Under the Split Dollar Rules
Could the split dollar regulations apply to the temporary assignment of policy death benefits? An analysis
of the split dollar regulations creates doubt as to whether an OYOP arrangement qualifies as a split dollar
arrangement. The regulations state that in a split dollar life insurance arrangement “at least one of the
parties to the arrangement paying premiums…is entitled to recover (either conditionally or
unconditionally) all or any portion of those premiums and such recovery is to be made from, or is secured
by, the proceeds of the life insurance contract.” See Reg. 1.61-22. In the OYOP strategy the insured
owner (who is also the sole premium payor) temporarily names the other owners as beneficiaries of the
death benefit and does not retain a right to recover any portion of the premiums he/she has paid from
the death benefits provided.
Should the IRS decide to apply the split dollar rules to an OYOP buy-sell arrangement, it could possibly
conclude that the arrangement should be treated as a private split dollar plan. In this event, an owner
who names another owner as a beneficiary of part or all of his policy death benefit could be deemed to
be making a gift to the other owners. The value of the gift could be the economic benefit value of the
death benefit provided. The economic benefit value is determined by multiplying the IRS Table 2001 rate
for the insured’s current age by the number of $1,000 units of death benefit that would be paid to that
owner if the insured died during the current year. If the necessary requirements are met, it is possible the
rates of an insurance company’s qualifying term policy could be used in place of the IRS Table 2001
rates. If a donee has a “present interest” in the gift, then it may qualify for the gift tax annual exclusion.
If no “present interest” exists, then the gift would reduce the donor’s lifetime gift tax exemption. These
would be “cashless” gifts since nothing tangible is actually transferred.Split Dollar example: Suppose A, B & C are equal owners of Wacky Widgets LLC. The business is
appraised to be worth $3,000,000 and the owners decide to use the OYOP
Buy-Sell. Their respective ages are A-55, B-45 and C-35. Each purchases a
$1,000,000 policy on his own life. Each names the other two owners as
equal beneficiaries of $1,000,000 of the life insurance coverage ($500,000
each). Based on the IRS Table 2001 rates, over the next five years each could
be deemed to make economic benefit gifts under the private split dollar rules
in these amounts:
No Taxation as a Fair-Market Value Sale
It may be possible to avoid taxation on the assignment of the life insurance benefits if each owner
annually pays the other owners fair market value for his/her share of the policy death benefit. What is
that value? A good argument could be made that it is the economic benefit value determined under the
split dollar rules.
This alternative could be compared to old-style “reverse” split dollar plans which were sometimes used in
the 1990’s before the IRS revised the split dollar rules. In these old reverse split dollar plans, an owner
had a personal life insurance policy on his/her own life. The corporation “rented” some or all of the
death benefits from that policy to meet its need for key person life insurance. It paid the owner-insured
an annual rental fee for the annual use of the owner’s personal life insurance death benefit protection.
The amount of the rent paid annually was the economic benefit value.
A fair market rental payment for temporary use of the death benefit coverage could be considered to negate
any potential gift from the policy owner. If the value of the death benefit protection is equal in value to the
rent paid, then it can be argued that the assignment of the death benefit creates no tax consequences
because items of equal value are exchanged. Under this reasoning, the assignment of the death benefit may
not create any taxable income to the policy owner, but the rental income each owner receives in return for
assigning his/her policy death benefits to other owners could be treated as taxable income.
A’s Annual Gift
B’s Annual Gift
C’s Annual Gift
Year 1 $4,150 $1,530 $ 990
Year 2 4,680 1,670 1,010
Year 3 5,200 1,830 1,040
Year 4 5,660 1,980 1,060
Year 5 6,060 2,130 1,07011
This strategy presents a new transfer for value issue because an interest in the policy death benefit is
being transferred for valuable consideration. However, an exception to the transfer for value rule may
apply to prevent potential adverse income taxation. The applicable exception is that the transfer goes
back to the insured. See IRC 101(a)(2).
If this is the tax approach the IRS adopts, what would be the economic impact to the shareholders?
Simply stated, the out-of-pocket cost to each shareholder would have three components:
(1) The cost of the premium on his/her own life insurance policy, LESS
(2) The total “rental” payment received from each of the other owners for the assignment of their
share of the policy death benefit, PLUS
(3) The potential income tax on the total of the “rental” payments received from the other owners.
Some Potential Disadvantages
Some possible disadvantages to an OYOP Buy-Sell arrangement include:
(1) A procedure for monitoring the policies should be implemented and enforced. The buy-sell
agreement could require each owner to present a quarterly, semi-annual or annual report of
the status of their life insurance policy. The business could hire a life insurance expert to
review the policy information and make an annual report.
(2) The policy beneficiary designations should be confirmed with the insurance company and
reviewed regularly.
(3) If applicable, economic benefit calculations would need to be performed annually and any
taxable gifts should be reported to the IRS; to the extent economic benefit gifts don’t qualify
for the gift tax annual exclusion, a portion of an owner’s lifetime gift tax exemption would
be used.
(4) Taxable gifts that reduce an owner’s lifetime gift tax exemption may also reduce the amount
of the estate tax unified credit available at the owner’s death; as a result, the amount of
property an owner may be able to transfer federal estate tax free at death may be reduced.160112 06/1/2011

For many years advisors to business owners have avoided having owners personally own the life
insurance policies that fund their buy-sell arrangements. This may no longer need to be the case. The
Own Your Own Policy Buy-Sell is a strategy which has the potential to provide many business owners
with the ability to own and control their life insurance policies while still maintaining policy death
benefits to fund buy-sell obligations triggered by death. Because the OYOP strategy has the potential to
combine buy-sell funding with personal life insurance needs, it gives them the opportunity to combine all
their life insurance needs in a single policy. It also gives business owners who leave their businesses
during their lifetimes more opportunity to customize, structure and manage their policies to provide
ongoing benefits after they leave the business.

These materials are not intended to and cannot be used to avoid tax penalties. They were prepared to support the promotion or marketing of the matters
addressed in this document. Each taxpayer should seek advice from an independent tax advisor.
The ING Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the
applicable laws change frequently and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors
regarding your individual situation.
Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY), and
Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its
products issued. All are members of the ING family of companies.
© 2011 ING North America Insurance Corporation cn67400052014
OYOP Applications
The OYOP Buy-Sell concept could potentially apply to a large number of businesses. That’s because many
existing businesses are currently structured as limited liability companies (LLCs), limited liability
partnerships (LLPs), professional limited liability partnerships (PLLPs) and general partnerships. The LLC
form of business is a legal structure that is being adopted by many new businesses. Owners of C
corporations and Subchapter S corporations often have assets that are used in the business but are
owned outside the corporation in a partnership. C corporation and Subchapter S corporation owners
may choose to create a partnership by contributing personal assets and/or taking distributions from the
corporation and funneling the after-tax portion of those distributions into a new partnership. In the
alternative, C corporation and S corporation owners could structure their life insurance buy-sell funding
to use the corporation exception to the transfer for value rule.