Surgeon with a Term Conversion Deadline, a Cross-Purchase Buy-Sell, and a Diabetes Diagnosis

The ordering is driven by three deadlines, not by the size of the estate.

1. The term policy expires in five years, at age 57, but the conversion privilege runs to 65. With an A1c of 8.1%, new underwriting would likely be rated or declined, so conversion is the only reliable path to permanent coverage. The planner should obtain conversion illustrations now, convert a meaningful portion before the health picture worsens or the term expires, and consider laddering conversions to manage premium outlay. Waiting until 65 is not a strategy because the term coverage itself ends at 57.
2. The buy-sell funding gap. The agreement requires $1.5 million on each other owner, but Dr. Patel's term funding disappears at 57. If he dies at 60, the buy-sell may be unfunded. The funding structure must be repaired before the conversion decision is finalized.
3. The will is from 2011 and there is no ILIT. The policy is owned by him and payable to his wife, so the proceeds are in his gross estate and outside any trust. At $3.8 million the federal estate tax may not apply, but state estate tax could, and the family loses control and creditor protection.
4. The $250,000 group term creates imputed income under Table I for coverage above $50,000 and terminates at retirement. It should not be counted as permanent funding.
5. Succession planning for the practice shares lags the buy-sell and should be coordinated with the other owners.

Convert first, fix the funding, then move ownership to an ILIT if the health and three-year survivorship risk are acceptable.

A cross-purchase with four owners means each owner owns a policy on each of the other three: 12 policies. An entity-owned redemption plan needs four policies, one on each owner, owned by the practice.

The trade-offs are real:

• Cross-purchase: surviving owners receive a step-up in basis in the acquired shares, proceeds are generally protected from the entity's creditors, and the arrangement avoids entity-level tax. But 12 policies mean 12 underwriting decisions, 12 premium allocations, and a coordination problem if one owner becomes uninsurable. Dr. Patel's diabetes makes that problem immediate: the other owners may be insurable, but his share of the funding is the weak link.
• Entity-owned: simpler administration and one policy per owner, and the entity can use the proceeds to redeem the shares. But the surviving owners do not get a basis step-up for the redeemed shares, the policy is exposed to the practice's creditors, and employer-owned life insurance on employees generally requires §101(j) notice and consent. Premiums are not deductible.

With term coverage expiring at 57 and a conversion deadline at 65, the structure must survive Dr. Patel's insurability. If the practice stays with cross-purchase, each owner should convert or replace his own funding now, not at retirement. A hybrid is often practical: keep the cross-purchase for the step-up, but use entity-owned permanent policies or a funded sinking reserve for the owner who cannot qualify. Any transfer of an existing policy between partners should be reviewed for transfer-for-value, because the partner exception is narrow and the death benefit could otherwise be reduced to basis plus premiums.

Ownership by Dr. Patel means the $1.5 million term proceeds are included in his gross estate because he holds incidents of ownership. His wife as beneficiary avoids probate, but she does not remove the estate inclusion or provide trust-level control.

If his wife owns the policy, it is excluded from his estate, but it becomes an asset of her estate if she dies first, and he loses control of the policy. That is a poor outcome for a family with minor children and a practice interest.

An ILIT is usually the better structure: the trustee owns the policy, proceeds are excluded from both estates if the trust is properly drafted and administered, and the trustee can manage the proceeds for the children and the buy-sell. The costs are the irrevocability, the three-year rule under §2035 if he transfers an existing policy and dies within three years, and the gift tax reporting. The gift of an existing policy is valued at the interpolated terminal reserve plus unearned premium, not face; premium gifts can be structured with Crummey withdrawal rights to use annual exclusions. Given his diabetes diagnosis, the three-year survivorship risk is not trivial, so the ILIT should be funded now rather than after a health event.

The planner should also update the 2011 will, coordinate beneficiary designations on the $1.1 million of retirement accounts, and confirm that the buy-sell and ILIT do not conflict over the same proceeds. If state estate tax is a concern, the ILIT is more valuable than the federal analysis alone suggests.