1. Problem 11-A: Adoft Inc. 11-11 Issues for Jane, Lewis and Peter
Objective of polices obscured – Key person vs buy-out.
Death benefit may trigger AMT and trapped inside Corp.
Premiums funded after-tax. Bracket racquet of C Corp structure might help this – low rates on first 75k earnings.
Policies subject to claims of corp creditors.
Policy amount may have little to do with company value.
No shareholder basis step-up on redemption.
No estate exclusion opportunities for shareholders.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

2. Problem 11-B: Adoft Inc. 11-12 Key Person Insurance: 500k on Lewis
200k on Jane and Peter
Corporate owns and is beneficiary of policies
Cross-Purchase Buy-Sell Insurance:
750k on each owner
Each policy owned by non-insured shareholders (1/2 each)
Corp covers premium burden with grossed-up compensation to each owner.
Family Protection:
Peter owns 1 mill or transfers to ILIT
Lewis owns 300k for term of years
Company pays to each compensation equal to Peter’s premium cost, plus tax gross-up.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

3. Problem 11-C: Bill Jones 11-13
Option 1: Bill owns policy, transfers to ILIT for family.
Company funds premium. Taxable income to Bill; deductible compensation for company; gross-up tax potential.
Three year rule applies for ILIT exclusion.
Premiums deemed gifts from Bill to ILIT. Crummey withdrawal provisions can help qualify for annual exclusion on gifts. Structure cash flow to make Crummey work.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

4. Problem 11-C: Bill Jones 11-14
Option 2: Company own all rights to policy until Bill retire; then transfer to Bill:
No income to Bill or deduction to company until policy transferred.
If Bill die pre-retirement, death benefit tax-free to company but compensation when paid to Bill’s estate.
Estate tax planning deferred until Bill retirement
Taxable comp income and related deduction when policy transferred.
Why? Company keeps control if Bill flakes and leaves early.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

5. Problem 11-C: Bill Jones 11-15
Option 3: Split Dollar
Company gets larger of premiums paid or cash value at Bill death. Bill’s family gets excess cash value.
Tax protection thru ILIT still possible. But Crummey requires cash planning. Compensation to Bill to cover insurance cost plus tax hit below.
Premium Tax Treatment: Bill has taxable income under both Endorsement Method or Collateral Assignment Method.
Advantage: Company recoups investment at death, but as result may need to buy more coverage now.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

6. Problem 11-D: Dustin Wilson
11-16
Problem 11-D: Dustin Wilson
Ideas for Dustin:
Revise deferred comp agreement to eliminate any benefit at death.
Split-dollar policy, with Company as owner and right to access cash value during Dustin life and recover remaining cash value at Dustin’s death.
Dustin can estate tax protect and income tax protect death benefit thru ILIT. Three-year rule applies. Dustin gifts to trust his interest in policy, and then trust funds its share of premium after Crummey procedure.
Increase Dustin’s compensation to cover his share of premium, plus related tax gross-up.
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

7. Problem 11-E: Jerry Bean 11-17 What is company worth?
Additional Facts:
What is company worth?
What is the value of Jerry’s estate?
What is Jerry’s estate tax exposure?
Will Jerry need access to the policy benefits before death?
Does putting the policy inside of corp expose policy to unnecessary creditor risks?
Depending on answers to above:
Keep policy ownership away from corp and in Jerry’s hands.
Get policy into ILIT and keep all incidents of ownership away from corp and Jerry.
Fund premiums through compensation adjustments
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

8. Problem 11-E: Jerry Bean 11-18 ILIT – Company Funded Policy C. Corp
Insurance.
Company
Additional
compensation
plus gross-up
Premiums
Cash gift subject
to Crummey
Executive
ILIT
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

9. Problem 11-E: Jerry Bean 11-19 ILIT – Split Dollar Funded Policy C.
Premiums C.
Corp
Insurance.
Company
Cash value at Death
Below market
loan imputed interest plus
compensation
Additional
compensation
plus gross-up
Premiums
Executive
ILIT
Cash gift subject
to Crummey
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com

10. Problem 11-F: Jerry Bean 11-20 Policy proceeds trapped in corp.
Jerry’s Present Plan:
Policy proceeds trapped in corp.
All corp incidents of ownership imputed to Jerry as majority stockholder. No hope of any estate tax exclusion.
Corporate AMT exposure, plus challenge of getting funds out of corporation and to family
Corrective Actions:
Transfer policy to Jerry as compensation. Should avoid any transfer-for-value problems because Jerry is insured.
Consider ILIT, which will trigger new three year clock.
Corp direct transfer to ILIT will trigger transfer-for-value problems
Copyright 2005 Dwight Drake. All Rights Reserved.
Business Planning: Closely Held Enterprises
www. drake-business-planning.com