MORTGAGE LIFE INSURANCE
An option to purchase mortgage life insurance is routinely given at the closing session. Mortgage life is simply term insurance on the decreasing mortgage balance. It requires that the mortgage be paid off, when the policy pays out, upon the death of the insured.
Mortgage life insurance is generally more costly than comparable term insurance. Also, it is not always desirable to pay off the mortgage balance at a death. This may be the case where there is an assumable mortgage at a low interest rate that would make the home more saleable or where the surviving spouse can continue to meet the monthly payments with insurance proceeds.
BUY SELL AGREEMENT
A buy-sell agreement specifies the terms of a sale of corporate stock or a partnership interest on the occurrence of a specific event, usually the death, disability, or retirement of one of the shareholders or partners. When one of the parties to such an agreement dies, the remaining partners or the corporation itself must purchase the deceased shareholder’s interest from his or her estate. The buy-sell agreement, which is legally binding, will either stipulate the stock’s repurchase price or establish a formula for determining it. From an estate-planning standpoint, a buy-sell agreement is attractive: it guarantees that cash will come into the estate just when funds are needed to pay federal estate taxes. Buy-sell agreements eliminate the possibility that the decedent’s stock might be unmarketable at a critical time.
The two most typical kinds of buy-sell agreements are both usually funded by an insurance policy taken out against the shareholder’s life. Under a cross-purchase agreement, shareholders usually hold life insurance policies on one another. In the event of one individual’s death, the other shareholders must use the policy proceeds to buy the decedent’s interest in the corporation. In a stock-redemption agreement, the corporation promises to redeem a shareholder’s stock in the event of his or her death. Either type of buy-sell agreement can be funded through a sinking fund or by life insurance.
A less well-known agreement with a great deal of merit is a “lifecycle” buy-sell. Here, a company’s owners set up a separate partnership, which buys separate life insurance policies on each owner. These policies fund the corporate buy-sell. The plan allows surviving owners either to use stock redemptions or cross-purchase techniques when one of the partners dies. Benefits include the ability to exchange partnership interests for the policy, and financial protection – the insurance policies cannot be attached by creditors of the business.
In the case of disability of one of the partners, the agreement could be structured to permit a disabled bought-out partner or shareholder to purchase his or her life insurance from the company. This will allow the disabled partner to gain access to a valuable asset that will be available to heirs.
A well-drafted buy-sell agreement should include most or all of the following:
1. To provide for the orderly transfer of stock interest on the death, retirement or disability of a shareholder
2. To permit retention of control by the remaining shareholders, thus maintaining an identity of interest between ownership and management
3. To create a market at a fair price for the interests of shareholders who have become inactive
4. To provide funding for the purchase
5. To fix the price for the sale and purchase
6. To fix the value of the stock for estate tax purposes
7. To reasonably assure the continuance of the business and reduce the risk of dissolution and loss of value
8. To provide a method of realizing gain on investments without having to treat the proceeds as ordinary income
9. To provide spendable cash or investment funds for the shareholder or his heirs that will meet their needs
10. To provide funds for the payment of death taxes and administration expenses
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