IDEAS June Cross Purchase Buy-Sell for Two Business Owners: Options for Funding with Life Insurance

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1 IEAS une 2013 Cross Purchase Buy-Sell for Two Business Owners: Optis for Funding with Life Insurance Summary Like skinning a cat, there is more than e way to arrange life insurance funding for a cross purchase buy-sell involving two business owners. Here are pros and cs of several methods. Related Informati Breaking the Cardinal Rule? Cross-Endorsements as an Alternative Method for Arranging Life Insurance Policies in a Cross-Purchase (10/10); Buy-Sell Agreements Funded With Life Insurance in brief (05/09) The typical scenario, and the typical questis ave and ulie own an S Corporati together, 50/50. They decide that they would like to enter into a cross purchase buy-sell agreement triggered by death (amg other triggers). They also decide that they d like to fund the agreement with life insurance. But there are questis. Should they buy term or permanent? Should each own a policy him or herself, or the other pers s life? oes split dollar have a role? Before diving into those questis, it s worthwhile to note two significant tax issues that permeate the analysis of virtually any buy-sell plan funded with life insurance Incident of ownership estate tax. Under 2042, the policy s death benefit is in the insured s estate for estate tax purposes if he holds any incidents of ownership over the policy. This includes outright ownership of the policy, of course, but can also include the right to name a beneficiary and some other powers over the policy. 2. Transfer-for-value rule income tax. Under 101, life insurance death benefit is normally received income tax-free. The transfer-for-value rule is an unwelcome excepti to the normal rule, in that it makes the death benefit income taxable if the policy or an interest in it, such as its death benefit is transferred for valuable csiderati (basically meaning transferred for any reas other than a gift). As such, the transfer-for-value rule is generally 1 Although this article csiders just a two-pers cross purchase, the issues covered here are essentially the same for cross purchase plans involving more than two owners, but with everything a bit more complex as the number of owners increases. What s more, if there are more than four or five business owners, some parties might csider yet another opti not mentied here: an escrowed buy-sell plan. Such an arrangement mimics having e policy per business owner, with each policy jointly owned by the n-insured business owners, but with e escrow agent acting as a nominal/cduit owner for these n-insureds. See Escrowed Buy-Sell Plan in brief (05/09) The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 1 of 14

2 triggered if the recipient of the death benefit is required to use the proceeds to buy the business interest of the deceased insured. Luckily, there are exceptis to the transfer-for-value rule that preserve the tax-free nature of the proceeds. These exceptis include transfers to (i) the insured, (ii) a partner of the insured, (iii) a partnership in which the insured is a partner, and (iv) a corporati in which the insured is an officer or shareholder. The other transfer-for-value excepti is when the transferee s basis in the policy is determined by reference to the transferor s basis (often called the carryover basis excepti). With that background in mind, described below are pros and cs of the following optis: cross-own term; cross-own permanent; cross-own term, plus permanent self; insured owns permanent self, names n-insured as beneficiary; insured owns permanent self, plus endorsement to n-insured; spouse of insured owns permanent, plus endorsement to n-insured; irrevocable trust of insured owns permanent, plus endorsement to n-insured. The various optis 1. Cross-own term Term Term ave () ulie () ave owns a term policy ulie and names himself beneficiary; ulie owns a term policy ave and names herself beneficiary. a. Pros: i. Simple. No transfer-for-value problem. There w t be any transfer of a policy or any porti of it. On each ctract, the owner is also the beneficiary and both are unchanged throughout. If they do trade policies when the buy-sell ends, the to the insured excepti of the transfer-for-value rule will be met. Smaller premium than for permanent policies. Bu yi n g term is more apt to make sense if ave and ulie have little mey to spare, or are absolutely certain that their buy-sell obligati will endure for a short time period (e.g., 5-10 years) The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 2 of 14

3 b. Cs: i. If buy-sell obligatis (and insureds) outlive the term, there is no coverage. If ulie and ave purchase term policies that endure for, say, merely 10 years, what happens if they stay in business beyd that time? They could easily still have a buy-sell obligati, but they wouldn t have insurance to cover it. Trying to buy new insurance years later will mean an older insured and a higher premium, and the insureds could have a health change that renders them uninsurable. Term policies w t help with a lifetime buy-out. If the buyout obligati is triggered by an event besides death e.g., disability or employment terminati term policies w t ctain any cash value that ulie or ave could dip into to carry out a lifetime buyout. To some extent this evokes the often stated (and often underthought) mantra of buy term and invest the difference. Even if ave and ulie are disciplined enough to invest the entire amount by which a permanent premium exceeds a term premium few folks truly are the tax-deferred growth of a permanent policy s cash value can often overtake a separate taxable investment in 10 or 15 years. 2 Over time, term might be more costly than permanent. Term policies are fine if the parties are certain that the buy-sell plan will terminate in just a few years, but such certainty is rare. If the buy-sell obligati lasts for 10 or 15 or more years, they might find that it s more cost-effective to buy permanent policies (for e reas, a permanent policy s dividends can be used to pay premiums). Insured does not ctrol policy self. The buy-sell agreement can require that ulie and ave regularly pay premiums the policy each owns the other, and not encumber the policy in any manner. But as is true with any cross-owned policies, term or permanent, the policy each is solely owned by the n-insured. Theoretically, then, ulie could hinder the buy-sell plan by collaterally assigning the policy insuring ave, or by transferring it, or by not paying premiums. What s more, ce the buy-sell ends, ulie could keep the policy ave s life. And ave could do the same with the policy he has ulie s life. To counter this, they might csider collaterally assigning the policy to the insured, or putting a restricti it that prohibits a beneficiary change without the insured s csent. But granting such power to the insured generally amounts to an incident of ownership a downside for those ccerned about the estate tax. 3 Another approach might be to add a provisi in the cross purchase agreement that requires 2 Of course, the cash value growth varies widely by type of policy and age of insured, but to run the numbers this buy term and invest the difference scenario, you can run a life illustrati in the Northwestern Mutual Network Illustrati System, and in the Output Optis secti of the input screen, under Ledger Type, select vs Term. 3 See Treas. Reg (c)(2); and Rev. Rul , C.B The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 3 of 14

4 the policyowner to offer to sell the policy to the insured when the buy-sell ends, but some legal authorities suggest that this too amounts to an incident of ownership. 4 To avoid the estate inclusi risk, ave and ulie might just hope that the other will live up to his or her legal obligatis under the agreement. 2. Cross-own permanent CV = Cash Value P = Premiums ave () ulie () ave owns a permanent policy ulie and names himself beneficiary; ulie owns a permanent policy ave and names herself beneficiary. a. Pros: i. Simple. Cash value of permanent policy can help with a lifetime buy-out. If the buyout obligati is triggered by an event besides death e.g., disability or employment terminati ulie or ave could dip into cash value to carry out a lifetime buyout. Withdrawals from cash value are normally tax-free up to basis, or can be in the form of loans against the policy. 5 Can be used after buy-sell ends. anent policies are just that permanent. So whether both ave and ulie outlive the buy-sell arrangement, or just e of them does, any permanent policy that remains can still be used for other needs, such as estate planning or survivorship income. b. Cs: i. Higher premium. anent policies cost more than term policies (but they offer more too). 4 See, e.g., Rev. Rul , C.B But see Estate of Smith v. Comm r, 73 T.C. 307 (1979), which found no incident of ownership under similar facts, where an insured employee had the right to buy the policy from his employer if the employer was going to surrender it. 5 Borrowing against the policy really entails borrowing from the insurance company and using the policy as collateral. The loan doesn t trigger income tax by itself. But a policyowner s failure to repay at least the interest the loan will cause the loan against the policy to grow (interest being added to principal). If the loan gets so large that it nearly meets gross cash value, the insurance company will lapse/surrender the policy to pay itself back, and the policyowner will be taxed any built-in gain (although he receives little or no cash from the policy to pay this tax). This is often called a surrender squeeze The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 4 of 14

5 Younger healthier pers pays high premium for policy insuring the older less healthy pers. An answer to this is that it is not a bad thing you pay more for premium an older insured because that policy is likely to produce death benefit soer but that view is not often appreciated by young and healthy policyowners (or the old and unhealthy, for that matter). Trading policies at end of buy-sell triggers income tax gain. If ave and ulie both are alive when their buy-sell need ends (e.g., they both retire), they likely would trade policies, so that the policy that ave owns ulie he transfers to her, and the policy that ulie owns ave she transfers to him. This meets a transferfor-value excepti each policy is going to the insured so the death benefit remains income tax-free. But it is a sale or exchange that triggers income tax under 1001 when the trade occurs. 6 Each pers in taxed the value of what is received (policy plus anything else), minus the basis in the policy transferred away. If ave and ulie equalize the value of what is transferred either because the policies have equal value, or, say, the pers with the lower valued policy pays extra mey then each pers is income taxed the gain that exists in the policy he or she transfers away. 3. Cross-own term, plus permanent self Term Term CV = Cash Value P = Premiums ave () ulie () ave owns two policies: a term policy ulie and names himself beneficiary; and a permanent policy himself and names his spouse (or whomever he chooses) as beneficiary. ulie also owns two policies: a term policy ave and names herself beneficiary; and a permanent policy herself and names her spouse (or whomever she chooses) as beneficiary. a. Pros: i. For a given death benefit amount to fund the buy-sell, premiums for term policies are smaller than premiums for permanent policies. If buy-sell is triggered at death, cross-owned term policies will avoid transfer-forvalue income tax problem (again, never had been transferred), and avoid estate inclusi (not owned by insured). 6 It does not qualify as a tax-free 1035 exchange because the policy relinquished by ave (insuring ulie) doesn t have the same insured as the policy he acquires (insuring ave). The same goes for ulie The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 5 of 14

6 If buy-sell is triggered during life e.g., ave retires ulie can dip into the cash value of the permanent policy she owns herself to make a down payment to buy ave s stock. Whether ulie owns a permanent policy that insures herself or ave (or somee else), distributis are tax-free up to basis, and policy loans are available too. As for the larger premium permanent policies, the younger healthier insured w t have to pay premiums the permanent policy insuring the older unhealthy co-shareholder. v. anent policies can be used after the buy-sell arrangement ends. vi. In order for ave and ulie to ultimately own permanent policies their own lives at the end of the buy-sell, there is no need to trade policies and trigger income tax. b. Cs: i. Little more complex. ave and ulie each would buy two policies. That s a bit more complicated than owning just e policy. Little more expensive. Buying two policies is pricier than owning just e policy. 4. Insured owns permanent self, names n-insured co-business owner as beneficiary beneficiary is ulie beneficiary is ave ave () ulie () ave owns a permanent policy himself, and simply names ulie as revocable beneficiary of much or all of the policy s death benefit. ulie does not pay ave for the cost of any insurance protecti, nor do they account for it any other way. A mirror image of this occurs with the permanent policy that ulie owns herself. If ave dies, the death benefit paid to ulie as beneficiary seemingly is tainted by the transfer-for-value rule her valuable csiderati being a promise, explicit or implicit, to use the proceeds to buy ave s stock. A transfer-for-value violati makes the proceeds income taxable to ulie. But if ave and ulie can enter into a separate partnership, there s a 2013 The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 6 of 14

7 good chance they can avoid this tax by meeting the transfer to a partner of the insured excepti. 7 As for ave s estate tax, he owns a policy himself, so there s estate inclusi for the death benefit under the incident of ownership rules. An estate tax deducti for the death benefit going to ulie seems unavailable here. There is some authority that such a deducti is permitted if there s a binding endorsement split dollar agreement and the endorsee pays the policyowner the cost of insurance see next opti but there is no endorsement or paying of an insurance cost here. 8 Same goes for the policy ulie owns herself. a. Pros: i. No split dollar complexity. ust a beneficiary designati. The transfer-for-value problem likely can be solved by having ave and ulie create a partnership together. At ave s death, the transfer-for-value problem relating to the death benefit going to ulie should be resolved by meeting the transfer to a partner of the insured excepti. Same is true in reverse if ulie dies. There is, however, some ambiguity about whether the partner of the insured excepti is available here. With a revocable beneficiary designati, some practitiers might fear that: (i) the transfer of an interest in a policy doesn t occur until ave s death; 9 and (ii) ce ave has died, he no lger is a partner, 10 so that at the time of the transfer, ulie no lger holds the status of being a partner of the insured. There might be reas to dismiss this fear as purely academic, 11 but for those who dislike ambiguity because it invites I.R.S. attempts to re-cast transactis in a way that increases taxes, 12 they might prefer a cross-endorsement instead (see next opti, number 5). 7 To meet this transfer-for-value excepti, they d t need to change the tax organizati of the existing S Corporati, nor do they need to have the death benefit go to the partnership itself. 8 Such was the cclusi of Private Letter Ruling (March 30, 1990), where an insured policyowner endorsed death benefit to his employer and the employer paid the e-year term cost for the proceeds it ctrolled. 9 The law is unclear as to whether an interest in a policy is in fact transferred by a mere provisi in the buysell agreement requiring ave to name ulie as beneficiary, if that designati is revocable the policy itself. 10 For example, a deceased partner s successor in interest often the dead pers s estate generally cannot act behalf of the partnership as an alive partner could. 11 Reass to think that the ulie should still be viewed as a partner of ave despite his death include the fact that the transfer-for-value rule is ly ccerned with taxati of death proceeds. By necessity, then, the rule becomes relevant ly ce the insured is dead. Also, the transfer-for-value rule generally functis as a protecti against those trying to avoid insurable interest rules by selling pre-existing policies to 3 rd parties having no relatiship to the insured. But the transfer-for-value exceptis recognize that partners generally have an insurable interest in each other (e.g., to carry out a buy-sell). It would be odd to deny the excepti to ulie here where she s ave s partner until he dies, but to permit the excepti if the policy insuring ave had been transferred to ulie while ave s alive and still ulie s partner, but they then terminate their partnership several years before ave dies. 12 For example, the I.R.S. might argue that, because no split dollar plan was in place and no accounting for cost of insurance occurred, the tax-free life insurance proceeds should be treated as if they were paid to ave s estate first, with a subsequent transfer of funds to ulie (how to characterize that transfer to ulie would be the questi) The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 7 of 14

8 If buy-sell is triggered during life e.g., ave retires ulie can dip into the cash value of the permanent policy she owns herself to make a down payment to buy ave s stock. Same is true in reverse if ulie retires. The insured who is younger and healthier w t have to pay premiums the permanent policy insuring the other pers who is older and less healthy. v. anent policies can be used after the buy-sell arrangement ends. vi. In order for ave and ulie to ultimately own permanent policies their own lives at the end of the buy-sell, there is no need to trade policies and trigger income tax. v Large and indexed estate tax exempti $5.25 milli in 2013 could render moot the fact that each insured will have the death benefit in his or her estate. ave and ulie just might not be that wealthy. b. Cs: i. eath proceeds paid to other business owner are in the insured s estate for estate tax purposes. This is a big deal if ave or ulie is wealthy enough to attract an estate tax. An executor could have an estate tax bill, say, a $20 milli estate ($10 milli value of stock plus $10 milli of life insurance), but ultimately have ly $10 milli to pay the tax (after having sold stock to the other business owner). Transfer-for-value problem if partnership not created. If ave and ulie forget to create the partnership, the death benefit paid to the other business owner is income taxed without any excepti to the rule being met. Transfer-for-value ambiguity even if partnership is created. As explained above in the pros, with a revocable beneficiary designati there is the fear that: (i) the transfer of the interest in the policy doesn t occur until the insured dies; and (ii) ce the insured dies, he can no lger be viewed as a partner, so the survivor cannot be treated as a partner of the insured. Again, for those who fear this possible outcome, they might want to use cross-endorsements instead (see next opti). The beneficiary has no ctrol over the policy or its death benefit (and so might never receive it) The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 8 of 14

9 5. Insured owns permanent self, plus endorsement to n-insured (cross-endorsement) endorsed death benefit endorsed death benefit ave () ulie () ave buys a permanent policy himself, and endorses much of the policy s death benefit to ulie through a split dollar agreement. ulie pays ave for the cost of this endorsed insurance protecti. If the buy-sell agreement terminates while ave is still alive, ulie releases the endorsement and ave keeps the permanent policy himself. A mirror image of this occurs with the permanent policy that ulie buys herself. 13 If ave dies, the endorsed death benefit paid to ulie would be taxable because the endorsement violates the transfer-for-value rule. To avoid this, ave and ulie enter into a separate partnership, so that any transfer is to a partner of the insured. As for ave s estate tax, he owns a policy himself, so estate inclusi for the death benefit under incident of ownership rules is likely, if not certain. But the binding split dollar agreement and ulie s payment of the cost of insurance might permit ave s executor an estate tax deducti for the amount of endorsed death benefit (as a deducti for mortgaged property under 2053(a)(4)). 14 a. Pros: i. Transfer-for-value problem can be solved by creating a partnership. If the buy-sell is triggered at death e.g., ave dies the transfer-for-value problem due to the endorsement to ulie is resolved by meeting the transfer to a partner of the insured excepti. Same is true in reverse if ulie dies. An endorsement more clearly meets the transfer to a partner of the insured excepti than a revocable beneficiary designati because of the timing of when the transfer occurs. An endorsement transfers a policy interest (right to name a beneficiary) currently, while the insured is alive, and while the insured is alive it is obvious that he still can be a partner. 13 For more details about this idea and its correspding tax issues, see our Planning Idea, Breaking the Cardinal Rule? Cross-Endorsements as an Alternative Method for Arranging Life Insurance Policies in a Cross-Purchase, Advanced Planning Bulletin, November Some refer to cross-endorsements as a form of reverse split dollar, but the rules are essentially the same as any endorsement split dollar plan 14 This was the cclusi of Private Letter Ruling (March 30, 1990), where an insured policyowner endorsed death benefit to his employer and the employer paid the e-year term cost for the proceeds it ctrolled The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 9 of 14

10 If buy-sell is triggered during life e.g., ave retires ulie can dip into the cash value of the permanent policy she owns herself to make a down payment to buy ave s stock. Same is true in reverse if ulie retires. The insured who is younger and healthier w t have to pay premiums the permanent policy insuring the other pers who is older and less healthy. anent policies can be used after the buy-sell arrangement ends. v. In order for ave and ulie to ultimately own permanent policies their own lives at the end of the buy-sell, there is no need to trade policies and trigger income tax. The release of the endorsement should not trigger any income tax. vi. Release of endorsement to insured w t cause transfer-for-value problem. It s not clear if a release of an endorsement is itself a transfer-for-value it might be the mere terminati of a transfer (the endorsement) rather than a new transfer but even if it is, here it meets the excepti of being transferred to the insured. b. Cs: i. Complexity. To do this properly, the parties need to enter into two split dollar endorsement agreements and annually account for the cost of insurance. Lack of certainty about estate tax deducti. The legal authority for the noti that ave is permitted an estate tax deducti for the endorsed death benefit is found in Private Letter Ruling Some attorneys might not feel comfortable relying n-precedential guidance. Policyowner-insured is income taxed the annual cost of insurance. The split dollar regulatis state that a policyowner who receives payment for endorsed death benefit is taxed those payments, just like a landlord is taxed rent received. 15 Transfer-for-value problem if partnership not created. If ave and ulie forget to create the partnership, the endorsed death benefit will be income taxed to the recipient because no excepti to the rule is met. 15 Treas. Reg (f)(2)(ii). Having the endorsee pay for the annual cost of insurance is needed to have the situati match the facts of the private letter ruling that permitted the estate tax deducti The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 10 of 14

11 6. Spouse of insured owns permanent, plus endorsement to n-insured endorsed death benefit endorsed death benefit ave s Spouse ave () ulie () ulie s Spouse This is virtually identical to the set-up described immediately above, except that ave s spouse owns the policy ave s life rather than he owning it himself, so that he avoids any incident of ownership. a. Pros: i. No estate tax problem. Because ave does not own a life insurance policy himself to begin with, he presumably doesn t need to worry about whether a deducti is permitted for the death benefit endorsed to ulie. The same is true for ulie. Transfer-for-value problem can be solved by creating partnership. As in the immediately preceding situati, the transfer-for-value problem can be resolved by ave and ulie creating a partnership together. If buy-sell is triggered during life, ave s spouse can dip into the cash value of the policy she owns ulie to provide ave the funds he needs to make a down payment to ulie for her stock. 16 ulie s spouse could do the same. The insured who is younger and healthier (or that insured s spouse) w t have to pay premiums the permanent policy insuring the other pers who is older and less healthy. v. anent policies can be used after the buy-sell arrangement ends. vi. In order for ave and ulie to ultimately own permanent policies their respective lives at the end of the buy-sell, there is no need for ave and ulie to trade policies and trigger income tax. 16 Transfers of mey or property between spouses generally have no gift or income tax csequences The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 11 of 14

12 b. Cs: i. Marital discord or divorce. ave doesn t own or ctrol the policy his life; his spouse does. ave s spouse could do things with the policy that ave doesn t like, and could even divorce him and potentially take the policy. 17 Complexity. Again, there will be two split dollar agreements with annual accounting for the cost of insurance. The policyowner (spouse of insured) is income taxed any annual cost of insurance amount received from the endorsee. Transfer-for-value problem if partnership not created. If ave and ulie forget to create the partnership, the endorsed death benefit will be income taxed to the recipient because no excepti to the rule is met. v. The release of an endorsement to insured s spouse might itself be transfer-for-value. And if it is a transfer-for-value the law is unclear it w t meet the to the insured excepti because it is going to the insured s spouse. 7. Irrevocable grantor trust of insured owns permanent, plus endorsement to n-insured endorsed death benefit endorsed death benefit ave () ulie () This is virtually identical to the set-up described immediately above, except that an irrevocable grantor trust owns the policy ave s life, rather than ave owning it himself or having his spouse own it. This should (i) avoid the incident of ownership that would occur if ave owned the policy himself, and (ii) also avoid any potential transfer-for-value when the endorsement is released, due to the irrevocable trust being a grantor trust under with respect to the insured Of course, even if ave himself owned the policy his life, that doesn t automatically shelter it from being divisible up divorce. 18 For purposes of the transfer-for-value rule, a transfer of a policy (and presumably, an interest in it) to a grantor trust under is treated as a transfer to the individual grantor. If that individual is the insured, then the to the insured excepti is met. Rev. Rul , I.R.B. (February 16, 2007) The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 12 of 14

13 a. Pros: i. No estate tax inclusi of death benefit. Cash value of policy still could be accessed (indirectly) for lifetime buy-out. If the irrevocable trust is drafted flexibly, the trustee could take cash from the policy and distribute funds to ave s spouse while he is alive to help with a lifetime buy-sell. Release of endorsement to irrevocable grantor trust w t cause transfer-for-value problem. Again, it s not clear if a release of an endorsement is a transfer-for-value, but even if it is, here it would meet the excepti of being transferred to the insured, as lg as the trust holding the policy ave is a grantor trust with respect to the ave. Same goes for the trust holding the policy ulie. If buy-sell ends while the insured is alive, permanent insurance in the trust can be used for other reass, especially for estate planning. b. Cs: i. Transfer-for-value problem if partnership not created. If ave and ulie forget to create the partnership, the endorsed death benefit will be income taxed to the recipient because no excepti to the rule is met. Complexity. Again, there will be two split dollar agreements with annual accounting for the cost of insurance. Each insured (as grantor of grantor trust that owns a policy) is taxed any annual cost of insurance amount received from the endorsee. Trustee fiduciary duties. The trustee of either trust has a fiduciary duty to the trust beneficiaries, e.g., to ave s spouse or children, not to ave. The trust should be drafted in a way that would make the trustee comfortable that this duty is being fulfilled even though most of the death benefit of a trust-owned policy is being endorsed to ulie, and is not coming to the trust. This could be aided by trust provisis that direct the trustee to use trust assets to facilitate transactis that could benefit the spouse and children even if they occur outside the trust (e.g., the buy-sell). It also might be aided by simply placing the endorsement the policy before it s put in the trust; the trustee can ly play the cards it s dealt. Any distributi to help with a lifetime buy-out should be similarly evaluated. Cclusi There is more than e way to arrange life insurance policies used for a cross purchase buy-sell. Unfortunately, there is no set-up that is inherently better than any other. All have their pros 2013 The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 13 of 14

14 and cs, and business owners should simply walk through these optis with knowledgeable legal counsel and their financial representative. This publicati is not intended as legal or tax advice; netheless, Treasury Regulatis might require the following statements. This informati was compiled by the advanced planning attorneys of The Northwestern Mutual Life Insurance Company. It is intended solely for the informati and educati of Northwestern Mutual Financial Representatives, their customers, and the legal and tax advisors to those customers. It must not be used as a basis for legal or tax advice, and is not intended to be used and cannot be used to avoid any penalties that may be imposed a taxpayer. Northwestern Mutual and its Financial Representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent tax advisor. Tax and other planning developments after the original date of publicati may affect these discussis. To comply with Circular The Northwestern Mutual Life Insurance Company, Milwaukee, WI Page 14 of 14