When funding insurance solutions to the needs of closely-held corporations and their shareholders, it makes sense to evaluate any difference in the individual's marginal tax bracket and that of the corporation. 

For example, a corporation in the 15% tax bracket gets to keep 85 cents of every taxable dollar it makes, while an individual in the 35% tax bracket gets to keep only 65 cents of every taxable dollar he or she makes. Since life insurance purchased to fund a buy-sell plan must be paid for with after-tax dollars, it may make more sense to pay the premiums with 85 cent dollars as compared to 65 cent dollars.

Impact of Tax Brackets on Buy-Sell Planning

Lower bracket corporation • If the corporation is in a lower tax bracket than the shareholders, a stock redemption buy-sell plan can be funded with enhanced dollars, since premiums are paid by the corporation.
Higher bracket corporation • If the corporation is in a higher tax bracket than the shareholders, a cross purchase buy-sell plan may be more cost effective since premiums are paid with enhanced dollars by each shareholder.  

Conversely, the marginal tax brackets of the corporation and shareholder-employees can have an impact on the total cost of a selective benefit plan. Benefits provided to corporate employees on a selective basis generally are either tax-deductible by the corporation or are not currently taxable to the employee, but not both. As a result, the relative impact of tax brackets should be considered in selecting a selective executive benefit plan that produces the most advantageous overall tax results.

 Impact of Tax Brackets on  Executive Benefit Planning

 Lower bracket corporation • When the corporation is in a lower tax bracket, selective benefits that are non-deductible by the corporation and non-taxable to the shareholder-employee generally produce the better overall tax results.
Higher bracket corporation • When the corporation is in a higher tax bracket, selective benefits that involve tax-deductible corporate payments are generally more advantageous, even if taxable to shareholder-employees.

---------------------------------------------------------------------------------------------

Editor: InsuranceHeadlines.com

By: Barry Mittman - B&R Insurance Services

1-800-455-1230