Survivorship life insurance can be an effective tool in the estate plan of the family business owner. Often the parents will retain majority ownership of a family business until the death of the second spouse. To avoid estate tax upon the first death, much of the deceased parent’s ownership interest will be transferred to the surviving spouse, which qualifies for the marital deduction. As a result, the surviving spouse’s estate will include most of the business value for estate tax purposes and death taxes could be significant. Frequently the family business, which is usually highly illiquid, is the major estate asset. In addition, the family heirs often desire to continue the business. If the liquidity needs cannot be met out of other estate assets, the family business may have to be liquidated or sold to outsiders to pay these costs.
SL coverage on the lives of parents who own a family business is designed to provide for these liquidity needs. A SL policy will provide benefits at the exact time they are needed—when the surviving spouse dies. The SL benefits can be used to provide the needed liquidity to the estate and provide distributable cash for family members who will not inherit the business interest. The use of a SL policy in these circumstances will both preserve the business of the family heirs and provide family harmony for the next generation.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM