Common Succession Scenarios
financial checklist for exiting your business (5 tips to ensure paying yourself more)
Another succession plan model that is growing in popularity is an employee-led buyout. This accomplishes a number of important things: helps to hold onto and retain key employees; gives a predictable timeline and transition schedule; and depending upon how the arrangement is executed can allow the business owner to get his/her true value out of the business and create an opportunity for employees to not overpay for shares and do so in a tax-effective manner.
A key person life insurance or critical illness policy on an employee that is owned by the corporation can provide an influx of capital into the corporation in the event of a death or a critical illness but also, in the expectation that he/she remains healthy, the paid premium (in the case of the Critical Illness policy) or cash value (in the event of a permanent life insurance policy) can flow into the hands of the employee to potentially assist with the buyout of the business.
The key is how this is executed and not considered a disposition of the policy. Depending upon how this is done can trigger a taxable benefit to the individual or not.