Protect Your Business When a Key Person Is Lost

Key person insurance held in trust means a trust, not the business, owns a life insurance policy on someone the business depends on. The trust or a family limited partnership (FLP) pays the premiums and receives the death benefit under its own documents. This page explains who holds each role, the tax points a CPA reviews, and the steps from a first meeting to policy issue. NR CPAs & Business Advisors is a Miami CPA firm. Insurance is offered by Nischay Rawal, a licensed insurance agent, separately from the firm’s accounting practice.

What Key Person Insurance Held in a Trust or FLP Is

It’s life insurance on an essential person, owned by a trust or partnership instead of the company. A trust can own it only if 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, and the life insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured. A key person is someone whose death or disability could materially affect the business. That might be an owner, an officer, or a key employee whose skills, customer relationships or leadership the business relies on. The Insurance Information Institute explains that this cover compensates a business for financial losses caused by that person’s death or disability.

When a trust or FLP owns the policy, neither the company nor the individual is the owner. The owner pays the premiums, holds the policy and collects the death benefit under the trust or partnership terms. The policy is usually whole life or term life insurance issued by a named insurer. The owner, insured and beneficiary are set in the application.

Some owners tie coverage to an estate or ownership plan instead of leaving it with the company. That keeps the policy aligned with who will hold the business interest later.

Who This Structure Is For

This structure suits owners whose documents already decide who controls and benefits from the business. It often fits:

• Owners of closely held companies, partnerships and professional practices whose value depends on one or a few people.
• Families who hold business interests through a family limited partnership and want the insurance inside that same structure.
• Owners with a trust in their estate plan who want to see how key person cover would be owned and paid out.
• Relatives or partners helping someone research options for a business they don’t run alone.

Which structure fits depends on the facts of each business, its ownership documents, and who is insured.

How Owner, Insured and Beneficiary Roles Work

Each role follows its own rule, so decide them one at a time.

• Owner: The trustee or general partner applies for and holds the policy. The trust document or partnership agreement sets who can act and how proceeds move. Florida partnership law lets the partnership agreement set many rules, but it has limits, including on the duty of loyalty.
• Florida law requires the insured, having legal capacity to contract, to apply for or consent in writing to the contract and its terms on or before the time the contract is entered into, except for prepaid funeral contracts, group life insurance, and group or blanket accident, health, or disability insurance, and except that a person with an insurable interest in a minor younger than 15, or a person upon whom such a minor is dependent for support, may obtain a policy on the minor. The written-consent rule does not apply to prepaid funeral contracts, group life insurance, or group or blanket accident, health, or disability insurance (Fla. Stat. 627.404). Prepaid funeral contracts, group life insurance, and group or blanket accident, health, or disability insurance are among the exceptions to the rule that the insured must apply for or consent in writing to the contract and its terms, and a person with an insurable interest in a minor younger than 15, or a person on whom such a minor depends for support and maintenance, may obtain a policy on the minor (Fla. Stat. 627.404).
• Insurable interest: A business can insure its owners, directors, officers, partners, or managers, or any affiliate’s or subsidiary’s of these, as well as key employees or key persons, if it gets their written consent before the insurance is purchased. A trust can insure its grantor, a close relative, or someone in whom the grantor has an insurable interest, if the life insurance proceeds are primarily for the benefit of trust beneficiaries having an insurable interest in the life of the insured.
• Beneficiary: Under Fla. Stat. 627.404, the benefits under a policy procured on another person’s life must be payable to the insured or the insured’s personal representatives, or to someone with an insurable interest in the insured when the contract was made. A trust, partnership, business or owners named in the documents can receive the death benefit only if they meet that test. Proceeds payable to the insured or the insured’s estate become part of the estate (Fla. Stat. 222.13). Fla. Stat. § 222.13 reads: “Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured or to the insured’s estate or to his or her executors, administrators, or assigns, the insurance proceeds shall become a part of the insured’s estate for all purposes and shall be administered by the personal representative of the estate of the insured in accordance with the probate laws of the state in like manner as other assets of the insured’s estate.”
• Premium funding: Write down who pays the premiums and how the owner records each contribution.

Tax and Cash-Flow Points a CPA Reviews

Death benefits are generally excluded from income, but premiums and estate inclusion turn on the structure. Here is what a CPA reviews first.

• Death benefit: 26 U.S.C. § 101 generally excludes amounts paid by reason of death, subject to exceptions. The IRS says interest on proceeds held by the insurer is taxable.
• Premiums: Federal law generally denies a deduction for premiums when the business is a beneficiary under the policy (26 U.S.C. § 264). Plan the premium budget without counting on a deduction.
• Trust or FLP ownership is reviewed to see who holds those rights. Ownership alone doesn’t settle the question.
• Cash flow: Compare the premium amount and payment period with the business budget.

Tax questions are reviewed by the CPA firm. Insurance is offered by the licensed agent, separately.

How the Process Works, Step by Step

The process moves from a coverage review to application, underwriting, issue and ongoing care. Timing depends on the insurer’s underwriting, so no fixed schedule is promised.

1. Coverage review. We review how much the business depends on the person, the ownership goals, and the documents already in place.
2. Structure and documents. The trust or FLP terms are reviewed alongside the client’s attorney.
3. Application and underwriting. Health questions are required, and issue may depend on insurability. The insurer decides whether and on what terms to issue the policy.
4. Policy delivery. The owner checks the policy as delivered, including the owner, insured, beneficiary and premium schedule.
5. Ongoing administration. Premiums are tracked, and beneficiary and ownership details are reviewed when the business or family changes.

Why Work With NR CPAs & Business Advisors

NR CPAs & Business Advisors is a Miami CPA firm. It helps families, professionals and business owners across the United States choose and buy life insurance, including Indian-American households and business owners.

• The firm reviews premium cash flow and tax effects alongside the insurance, which is the CPA view this page describes.
• Nischay Rawal is the responsible agent for this page. He is a licensed insurance agent, and insurance is offered through him separately from the accounting practice.
• Our team organizes the documents and questions for each coverage review.

Questions Buyers Ask Before Deciding

Most buyers ask who owns the policy, who gets paid, and whether taxes change.

Take the Next Step: Request a Coverage Review

If a partner’s health is changing, or a family member is helping you plan for a loss you didn’t expect, this decision may be in front of you now. You’re researching, and that’s a sensible place to start. When you’re ready, contact NR CPAs & Business Advisors to schedule a coverage review of your trust or partnership question. Protecting your loved ones and your business starts with knowing how the policy is owned, paid and tied to your documents. Call us today.