Terms from A-E
Annual Gift Tax Exclusion – An annual monetary amount ($15,000 in 2020) that each person may give away without gift tax consequences. This amount can be doubled for married couples. The exclusion amount is also indexed for inflation.
Applicable Exclusion Amount – The amount of assets that can pass to a non-spouse after death, free of federal estate tax. In 2020, the amount is $11.58 million per individual. Married couples can get the benefit of two individual exemptions totaling more than $23 million in 2020.
Business Valuation – A process for estimating the fair market value of a company using established principles. Professional appraisers are skilled in business valuation techniques, which often use multiple analytical methods to create an estimate of the price a willing buyer would pay for the business in an arm’s-length transaction.
Buy-Sell Agreement – An arrangement through which two or more owners of a business determine the conditions and price at which they will sell shares to each other. The agreement may establish events that trigger a share exchange, such as death, disability, or retirement. It may also specify a formula for valuing each owner’s shares, and identify source(s) of buy-out funding.
C Corporation – A structure for organizing a company as a legal entity with continuous life, separate from any individual owner or shareholder, under state law. Under U.S. federal income tax law, the income of a C corporation is taxed at corporate rates, separately from the returns filed by company owners. Directors and managers of a C corporation normally have limited liability for the debts and obligations of the company.
Cash Surrender Value – The amount an insurance company will distribute to a policyholder who surrenders a permanent life insurance policy with cash value. Usually it is the policy’s cash value less any surrender charges.
Closely Held Business – A privately held company with a limited number of shareholders. The company’s stock is not offered to the public, and shares may have limited liquidity.
Collateral Assignment (Loan Regime) Split Dollar – A type of split dollar program in which the key employee owns a life insurance policy on his or her life and has an interest in the cash value. Premium payments made by the employer are treated as loans. The employer normally charges interest on these premium payments based on the IRS 7872 rate.
Cross Purchase Agreement – An agreement between owners or partners of a business under which they agree to purchase each other’s shares upon designated trigger events such as death, disability, or retirement. The obligations established in these agreements often are funded with life insurance.
Economic Benefit Regime (Split Dollar) – A type of split dollar program in which the company advances part or all of the annual premiums required to fund a permanent life insurance policy for a key executive. The employer owns the policy and its cash values. Split-dollar arrangements are implemented for key employees or executives as supplemental compensation.
Estate Planning – A process designed to evaluate and mitigate the impact of federal estate and other transfer taxes, while also helping to distribute assets efficiently at death without the public disclosures and delays of probate.
Executive Bonus Plan (Section 162) – A type of non-qualified executive benefit in which an annual bonus is used to purchase permanent life insurance owned and controlled by the executive. In a “double bonus” plan, the employer also bonuses enough money to pay the annual income tax due on the bonus.