At the recent annual meeting of the Association for Advanced Life Underwriting, Stephen O. Rothschild shared some of the techniques he has used when planning the continuation of a client’s business.
One method explained by Rothschild, who is president of Rothschild and Sale in St. Louis, Mo., was the use of a business irrevocable life insurance trust (BILIT(TM)). A BILIT is an irrevocable life insurance trust holding the policies that will fund the cross-purchase buyout at the time of an owner’s death.
“Most advisors you deal with haven’t heard of this term,” he said.
The example Rothschild used had 3 business owners, all owning equal shares of a $15 million business. He explained that under a traditional cross-purchase arrangement, each owner holds insurance policies covering the remaining 2 owners for their respective share (in this instance, each owner would own a policy insuring each of the other 2 owners for $2.5 million).
This design has been widely used and results in the inclusion of all business ownership in each respective estate. Rothschild showed how use of a BILIT can remove the buyout share from the estate of the surviving owners.
Each owner forms a BILIT, which holds the policies on the other two owners.
At the first death, Rothschild explained, the BILITs of the surviving owners purchase the deceased owner’s shares. Then, each BILIT increases coverage on the remaining two owners.
At the second death, the BILIT of the last surviving owner again purchases the deceased owner’s shares with the proceeds from the life insurance policies.
While the end result gives no estate tax advantage to the first owner to die, Rothschild explained that the ownership interest that was purchased by the BILITs will remain outside of the estates of the other owners.