Insurance Funded Death Benefit Plan Reduces Taxes

A Death Benefit plan is a “non-qualified” plan where your company agrees to pay a death benefit equal to two times your salary for one of your designated heirs. It is non-qualified because you donot have to offer this plan to all employeesand you can discriminate in favor of officers and directors. Your business can purchase life insurance to fund all or a portion of the benefit.

1. Proceeds from the insurance are tax-free to the company.
2. The company can deduct the payments it makes to the designated beneficiary
3. The plan can be discriminatory and cover only selected individuals
4. The proceeds of the insurance are not included in the estate of the employee

Potential Drawbacks:

1. If the employee desires to retain the right to change the beneficiary or to receive an annuity from the policy, the proceeds will be included in the employee’s estate
2. The death benefit payments are taxable income to the beneficiary

There are many situations in which a death benefit plan can be a useful tool for the small business and family-owned business. When the death benefit plan is tied into the estate plan and business plan, it can be a powerful tax saving and tax shifting tool. The plan requires careful drafting by your tax and business attorney and coordination with your insurance broker and other financial advisers. Call Ronald J. Cappuccio, J.D., LL.M.(Tax) at (856) 665-2121.