Life Insurance and your payroll deductibles (Insurance Part 12)

Presented by Paystrubmakr.com      By John Wolf and Tom Cullen CPA

This time paystub maker brings you important information about your deductible insurance Premiums. 

Premiums for key person

Key-person life insurance (Wiki)

Premiums for key person insurance on the life of an officer or employee are deductible provided that the taxpayer is not the direct or indirect beneficiary. The need for key person life insurance will be more apparent in the commercial corporation than will generally be the case in the professional corporation. The reason is that in an incorporated law firm with five attorneys, the death of one attorney will not be likely to cause the other four to be unable to continue operations.

However, in a commercial corporation, the entire business may well depend upon the expertise or contacts of one shareholder. Although key person life insurance may not be very important in all cases, it should not be overlooked. For example, if a professional corporation incurs an obligation, the lender may require the individual shareholders to personally guarantee the loan. In this instance, key person life insurance can be used to protect the surviving shareholders and their estates from liability. Standard Tax Deduction: How Much It Is in 2020-2021 and When to Take It

Closely Held Corporations 

Privately held company Wiki

Key-person life insurance can be justified in the most closely held corporations as protection against the untimely death of the one person who is responsible for the financial success of the corporation. The amount of insurance acquired is not subject to a precise formula because of the existence of so many variables.

Some considerations to be taken into account are the insurer’s underwriting limits, the age of the individual to be insured, value to the corporation, and anticipated financial loss. It should also be noted that corporate-owned life insurance will usually be subject to the claims of corporate creditors.

  

Sole Shareholder Applications

Private limited company

Key-person life insurance can be extremely attractive to the sole shareholder corporation from an estate planning point of view. The reason is this: as long as the corporation remains the sole owner of the policy, and the sole beneficiary, the premiums paid by the corporation will not be taxed to the insured. At the death of the insured, the death benefit will increase the corporation’s net worth and liquidation value.

However, the decedent’s stock will receive a step-up in basis at death so that the liquidation will generally be effected without a capital gains tax liability to the estate or heirs. The value of the stock for federal estate tax purposes should not be more than the distribution upon liquidation, particularly where the liquidation takes place shortly after the shareholder’s death. Consequently, the estate will receive the life insurance proceeds as corporate cash without the imposition of any capital gains tax.

What Happens When a Sole Proprietor Dies?

PAY-STUB MAKER   will soon come with the New Tax Payroll information. Keep tuned