Financing the Replacement of a Key Employee

Financing the Replacement of a Key Employee

There are three methods commonly used to finance the replacement of a key employee:

Establish an Accumulation Fund

However, dollars kept in a savings account represent lost business opportunities.

Borrow the Funds

This option assumes that the loss of a key employee does not seriously damage the firm's credit-worthiness. Each dollar borrowed

must be

repaid, with interest.

Life Insurance Policies

Many business owners choose life insurance to protect themselves against the loss of a key employee. The premiums are small

compared

to the lump sum which would have to be quickly raised, out of earnings, or by borrowing when a death occurs. Although the

premiums paid

on the life insurance policy are not a deductible business expense, the proceeds at death are generally received

income tax free by the

company.* If permanent type policies are used, there will also be a cash value buildup, which can be available

to the business in time of

need.

For more information and help with your business planning needs, contact an ABG representative.

*Proceeds are included in "adjusted current earnings" to the extent that they exceed the policy's tax basis, for purposes of the Corporate Alternative Minimum Tax. Beginning in 1998, the

Taxpayer Relief

Act of 1997 repealed the AMT for "small" corporations. In general, a small corporation is one which has generated average gross receipts of $5,000,000 or less for the three

previous tax years.

Key Employee Insurance Cont'd (page 3)