Protect the Business Your Family Depends On

A holding company or a family trust can own a key person policy in many structures. The right choice turns on who would lose money if the key person died, who pays the premiums and who should receive the death benefit. NR CPAs & Business Advisors is a Miami CPA firm. This guide explains how those roles fit together for business owners in Florida and across the United States.

Short answer: who can own a key person policy

A holding company or a family trust can own a key person policy when the structure supports it. Four roles make this work, and they don’t have to sit with the same party.

• Policy owner: the party that controls the policy.
• Insured person: the key employee, partner or owner whose life is covered.
• Premium payer: the party that pays the premiums each year.
• Beneficiary: the party that receives the death benefit.

Key person coverage is meant to protect a business. The Insurance Information Institute explains that it compensates a business for financial losses caused by a key employee’s death or disability. Florida law lets a business entity insure certain key people, but only with that person’s written consent given before the policy is bought (Fla. Stat. § 627.404). The right answer depends on the facts. Those facts include the ownership chart, the business agreements and the owner’s goals.

What a holding company and a family trust each do

A holding company owns shares or interests in one or more operating companies. It is a separate legal entity from those companies. A family trust holds property for named beneficiaries under a written trust agreement, and a trustee manages that property for them.

Owners look at each for different reasons. A holding company can keep ownership in one place when operating companies change. A family trust can connect the policy to the family’s estate plan.

Neither one works on its own. The entity’s governing documents must match the plan. In Florida, except as otherwise provided in subsections (3) and (4) of Fla. Stat. § 605.0105, an LLC’s operating agreement governs relations among its members and between the members and the company. The statute’s rules fill in the matters the agreement does not address (Fla. Stat. § 605.0105). A trust’s terms should also make the trustee’s power over the policy clear.

Ownership, premium payer and beneficiary: how the roles fit together

The most common setup has the operating company own and pay for a policy on a key employee. The company is also the beneficiary, because it carries the financial hit if that person dies. A holding company can follow the same pattern for an owner-executive.

Trust-owned setups look different. A trust may own a policy on an owner, with premiums paid from company or family funds. The beneficiary may be the trust or family members, depending on the trust’s terms.

Match the payer and the payee on purpose. If the company pays premiums but a trust receives the money, the written agreement should explain why. An unexplained mismatch often leads to questions later.

Changing ownership later can carry its own rules. Under IRC § 2035(a), if a decedent transferred an interest in any property, or relinquished a power over any property, during the 3-year period ending on the date of the decedent’s death, the value of that property (or interest therein) is included in the gross estate when it would have been included under section 2036, 2037, 2038, or 2042 had the transferred interest or relinquished power been retained on the date of death. Plan the structure before the policy is issued, not after.

Insurable interest, consent and underwriting

Under Florida law, a person buying insurance on another person’s life generally needs an insurable interest in that person when the contract is made, unless the benefits are payable to the insured or the insured’s personal representatives, or to any person having, at the time such contract was made, an insurable interest in the individual insured. An insurable interest is a legal stake in a person’s continued life. In a business setting, it usually comes from the working relationship.

Florida law says a business entity has an insurable interest in its owners, directors, officers, partners, managers, and key employees or key persons. The entity must get written consent from that person before buying the insurance (Fla. Stat. § 627.404). The business may not retaliate against a key employee or key person who refuses consent. A trust, or the trustee of a trust, can also hold an insurable interest in the life of an individual insured under a life insurance policy owned by the trust, in limited cases: where the insured is the grantor of the trust, an individual closely related by blood or law to the grantor, or an individual in whom the grantor otherwise has an insurable interest, provided the life insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured.

Underwriting applies to the insured no matter which entity owns the policy. Coverage is subject to health questions, and issue can depend on insurability.

Estate planning and the family trust

A reversionary interest, meaning a chance the policy or its proceeds return to the insured or may be subject to a power of disposition by the insured, counts only if its value exceeded 5 percent of the policy’s value just before death. That detail matters when a trust or company structure is being designed.

A trust or holding company can also work alongside a buy-sell agreement. The terms must line up. Who buys, who receives the proceeds and what the trust says should all match the business documents.

Estate and gift results turn on the specific trust terms. These points should go to the owner’s legal counsel alongside the insurance plan.

Tax and cash flow points a CPA reviews

As a general rule, premiums are not deductible when the taxpayer is a beneficiary. IRC § 264 says no deduction is allowed for premiums on a life insurance policy if the taxpayer is directly or indirectly a beneficiary. A company that receives the death benefit should review this rule before it pays premiums.

The same section treats a policy as held by the business, not a natural person, when a trade or business is directly or indirectly the beneficiary, except a trade or business carried on as a sole proprietorship or one performing services as an employee.

For the death benefit, IRC § 101 generally excludes life insurance death benefits from gross income. Tax results turn on each structure’s details.

Cash flow matters too. Decide who funds the premiums, how the payments are recorded in the company or trust, and whether the cost fits the budget for years. NR CPAs & Business Advisors offers accounting and tax services as a separate practice from its insurance business.

Questions to answer before choosing the owner

Start with three questions. Who loses money if the key person dies? Who will pay the premiums? Who should receive the money?

Then check the paperwork:

1. Does the holding company or trust already exist, and do its terms fit this policy?
2. Does the operating agreement or shareholder agreement allow the entity to own and pay for the coverage?
3. Is there a buy-sell agreement, and does it match who pays and who receives proceeds?
4. Has the insured person given written consent?

Write the answers down before any application is signed. Changes after issue can be harder to make.

Talk through your ownership structure with our team

A coverage review is the first step for owners working through this question. If your operating company sits under a holding company or a family trust, and you’re deciding who should own a policy on a key owner or manager, our team can walk through it with you.

Bring the core decision: who pays, who receives the death benefit and whose life is insured. Contact NR CPAs & Business Advisors to start a coverage review.

Nischay Rawal is a licensed insurance agent. Insurance is offered by the licensed agent, separately from the accounting practice of NR CPAs & Business Advisors.

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