Did You Know That…
Tax brackets have an impact on funding insurance solutions to the needs of closely-held corporations and their shareholders?
For example, a corporation in the 21% tax bracket gets to keep 79 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 79 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 the corporation pays premiums. 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
| Impact of Tax Brackets on Executive Benefit Planning | Lower bracket corporation — When the corporation is in a lower tax bracket, selective benefits that are nondeductible 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. |
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