Business Owner Life Insurance in Texas

Business owner life insurance in Texas starts with a plain question: if you or a partner died next month, would the company have the cash to pay its people, keep its customers, and complete a fair buyout? In a state built on closely held companies, the right coverage can answer yes without a rushed decision about the business.

Texas Companies Run on a Few Key People

Texas owners tend to be hands-on. Think of the roofing and framing contractor who holds the license and the bank relationship, the two partners in an oilfield services company, the owner of a trucking fleet, the family that runs a ranch and a feed store, or the dentists who share a practice in Plano. Each company depends on a small group whose knowledge cannot be replaced overnight.

When one of those people dies, a lender may call a line of credit, a bonding company may ask questions, and a surviving spouse may inherit a share of a company she has never helped run. Cash on hand is what buys time to sort it out.

Funding a Buy-Sell Agreement

A buy-sell agreement sets the price and the terms for what happens to an owner's share at death, disability, or departure. It is only as strong as the money behind it. Life insurance on each owner is a common way to supply that money, and it lets the family receive a fair payment while the surviving owners keep control.

• Cross purchase. Each owner holds a policy on the others and buys the share directly.
• Entity redemption. The company owns the policies and buys back the share.
• Insurance LLC. A separate entity holds one policy per owner, which can simplify things when there are several partners.

The structure you choose changes the tax and paperwork results, and your attorney should draft the agreement. Our comparison of cross purchase and entity redemption walks through the tradeoffs. If the agreement was written years ago, ask whether the stated value still matches what the company is worth today.

Community Property and the Spouse's Role

Texas is a community property state, which means a spouse may have an interest in a business built during the marriage. That can affect who ends up owning what after a death or a divorce, and it is a good reason to confirm that your buy-sell agreement, your will, and your policy beneficiaries all point the same direction. An attorney who works with Texas business owners can tell you how the rules apply to your situation.

Key Person Coverage for the Employee You Cannot Replace

The top estimator, the lead geologist, the service manager who keeps customers calm, or the physician who brings in the referrals can all be key people. Key person coverage pays the company if that person dies, which may help cover recruiting, reassure a lender, and give clients time to stay put. Premiums on key person coverage are generally not deductible. See how much key person insurance a business needs for ways to size it.

Taxes and Protections to Ask About

As far as we know, Texas has no personal income tax and does not charge its own estate or inheritance tax, though entities may owe the state franchise tax and federal estate rules can still reach larger estates. A business can make an owner's estate look wealthy while leaving little cash for the family. Texas law also provides notable protection from creditors for certain life insurance values, with conditions and exceptions. Ask your attorney and CPA what applies to you today, rather than relying on a general summary.

Rules to Check Before You Arrange Coverage

• Notice and consent. When a company owns life insurance on an employee or owner, federal law generally requires written notice and consent before the policy is issued, and the company files IRS Form 8925 each year. Our post on Section 101(j) notice and consent explains the details.
• Ownership that matches the agreement. The owner and beneficiary of each policy should line up with the buy-sell structure.
• Existing policies. Moving a policy during a restructure can trigger the transfer-for-value rule, so ask before changing anything.
• Entity type. Tax results depend on whether you operate as an S corporation, a C corporation, an LLC, or a partnership.

Working With Your Attorney and CPA

Your attorney drafts the legal documents and your CPA confirms the tax treatment. Cornerstone designs the insurance side and checks that it fits the agreement. Start with our overview of life insurance strategies for business owners, or schedule a conversation and bring your current buy-sell agreement. We will read it with you and flag anything worth raising with your advisors.