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Custom Tailored Insurance StrategiesSolving the Business Owners’ Solutions Gap
Recognize the Paradigm Shift
• Increased exemption amounts• Uncertainty regarding future transfer tax laws• Shifting net worth• Sophistication and multiple client needs• Clients’ demands for more flexible product choices
Consider: a Business Owner Approach
A business owner-focused approach recognizes the new reality of today’s successful clients because it acknowledges the business as the source of their success.
The Impact of the Business Owner
Small Business Firms*• Pay 42% of total U.S. payroll• Represent 99.7% of the 29.6 million U.S. businesses• Account for 65% of net new jobs
Family Business Firms**• 78% of all businesses are controlled by families
* U.S. Small Business Administration: http://web.sba.gov/faqs. (Drop down menu: Advocacy Small Business Statistics and Research)** LIMRA Study, Jan. 28, 2013.
Reality of the Business Owner Market
*James T. Scanlon. “Sizing Up Small Business Owners.” LIMRA, 2015.**Guardian Small Business Owner Retirement Readiness Study, 2014.***Boris Groysberg and Deborah Hall. “Generation to Generation: How to Save the Family Business.” Harvard Business Review, April 10, 2014.
27% of business owners have a retirement succession plan*
58% of business owners find it difficult to completely retire from their business**
30%of family-owned businesses survive the succession from the founder to the next generation, AND only 15% make it to the third generation**
32% do not have a plan to earn income if they become sick or injured and can no longer run their business**
Who Are the Business Owners?
* Scott R. Kallenbach. "Finances of the Affluent.” LIMRA, 2015.** Tax Foundation. No. 314 Fiscal Fact. June 6, 2012.*** Kyle Pomerleau. "An Overview of Pass-through Business in the United States.” Tax Foundation, January 21, 2015
The average affluent business owner has at least $500,000 in assets to invest.*
85%
51%
of partnership and S corp income is reported by individuals making $250,000 or more annually.**
of all pass-through income is earned by taxpayers subject to the top two tax brackets of 35% and 39.6%.***
Most business owners are directlyimpacted by higher taxes
Kyle Pomerleau. "Individual Tax Rates Impact Business Activity Due to High Number of Pass-throughs." Tax Foundation, September 3, 2013.
Top Personal Marginal Tax Rate for Owners of Pass-throughs*
Rates of Business Ownership
Source: WealthEngine, 2013.Analysis: CEG Worldwide and WealthEngine, 2014
33.3% Affluent
74.5% Super Affluent
89.9% Ultra Affluent
Percentage of Business Owners that Own a Financial Product
How do we solve the solutions gap?
2000 2005 2010 2015 2020
Dollars in
Billions
Year
The Solutions Gap
Income Tax CollectionsEstate Tax Collections
1800
1600
1400
1200
1000
900
100
Business Owners’Solutions Gap
$25B
$17B
$1.1T
$1.6T
Succession PlanningBuy-Sell LLC and Retirement Buy-Sell
Custom Tailored Solutions | Part 1
Buy-Sell LLC and Retirement Buy-Sell
• Combines favorable attributes of a traditional cross-purchase and entity redemption agreements
• Provides retirement income
The Buy-Sell LLC
Client Profile
The Business• Multiple owners who are also owners in a valid pass-through entity such as an LLC or partnership• LLC is owner, beneficiary, and premium payer of life insurance• Generally three or more owners• Address transfer for value issues
The Owners• Fund a buy-sell agreement using one entity to control and facilitate the purchase• Obtain a step-up in basis• Redirect assets initially set aside for the buyout for current retirement purposes• Liquidity for transfer taxes if needed
Operation of Buy-Sell LLC
Cash bonuspaid to owners
Owners contribute
cash bonusesto the LLC
LLC uses bonuses
to purchase policy on life
of each owner
Purchase of business interest
OR supplemental
retirement income
Dealing with Premium Inequity
A “special allocation” permits the partners to treat an item of income or deduction on a non-pro-rata basis PROVIDED THAT the special allocation has substantial economic effect, and certain other regulations are observed.
An allocation to partner will have economic effect to the extent that a partner realizes or bears the economic burden of the allocation.
Impact of Owners’ Lifetime Exit
*If policy is distributed upon retirement, and cash value is accessed, loans and withdrawals will decrease the cash value and death benefit. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.
Partners retiring from buy-sell LLC could receive the policy on their life as part of their LLC share and use it for retirement.*
Impact of Owners’ Death
*NOTE – Depending on the terms of the LLC this special allocation may require an amendment to the membership agreement. Clients should be sure to consult with their attorney.
Full death proceeds are allocated to surviving partners, allowing them to purchase decedent’s interest and to obtain their proportionate share of a basis increase.*
Insurance Company
Buy-SellLLC
Decedents Ownership Interest
Purchased
Death Proceeds
Purchase of Interest
Impact of Owners’ Death
Benefits • Efficient buy-sell solution for multi-owner entities (i.e., one policy per owner)• AMT, transfer for value, and family attribution do not apply• Minimize premium inequity• Can provide retirement income* OR death benefits to complete a buy-sell agreement• Tailored to permanent cash value life insurance• Basis step-up
Considerations• Possible estate inclusion• Existence of a bona fide operating LLC• Exposure of life insurance to creditor claims• As a preexisting LLC must be used, the entity must account for assets/liabilities that will
differ from policy cash values at distribution• Important to comply with COLI best practices
The Retirement Buy-Sell
Client Profile• Business owners who need to create assets to fund a buy-sell
agreement and accumulate assets for retirement• C or S corporations where there is more than one owner AND the
business owners are also partners in a partnership• Businesses that already have a buy-sell agreement unfunded OR
funded with only term insurance
Three Components of the Strategy
§162 bonus arrangement between company and each business owner
Buy-sell agreement between owners
Private endorsement split dollar agreement between owners
The following slides present hypothetical examples intended for illustrative purposes only.
123
Retirement Buy-Sell in Action: Death Scenario
Both Partners Live to Retirement
• Endorsements are released• Business is sold• Each individual has owned their own policy since inception• No need to “swap” policies, which might have resulted in taxable income• Each individual has access to their respective cash value
* Tax-favored distributions assume that the life insurance policy is properly structured, is not a modified endowment contract (MEC), and distributions are made up to the cost basis and policy loans thereafter. Loans and withdrawals will decrease the cash value and death benefit. If the policy has not performed as expected and to avoid a policy lapse, distributions may need to be reduced, stopped and/or premium payments may need to be resumed. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences.
Both Partners Live to Retirement
Benefits• Purchasing one dual-purpose policy reduces the overall cost of insurance• May cost less to obtain needed death benefit vs. term policy• Business owners can make additional policy contributions to boost retirement
income*• Money for buyout is tax-favored at retirement and at death
Considerations• If both buy-sell agreement and private split dollar agreement are executed
properly, the death benefit is estate tax neutral• Business owners may need to modify amount of endorsement to keep
current with business value• Business owners must also be partners in a partnership or owners in a pass-
through LLC in order to avoid transfer for value results under IRC Section 101(a)(2)
Saving for RetirementSplit-Funded Defined Benefit Plans and Business Owner Retirement Builder
Custom Tailored Solutions | Part 2
Split-Funded Defined Benefit Plan
Client Profile• Older business owner (45–60)• Few employees• A retirement planning gap• Sufficient annual cash flow• High tax bracket• Income tax savings• Medical professional, engineer, architect• Insurable
Evaluating the Proposed Strategy
Most Important Questions
What are the annual out-of-pocket costs?
If Tom dies before retiring, how much of the policy’s death benefit will remain tax-free?
What is the tax impact if the policy is distributed to Tom at retirement?
1
2
3
Other Pertinent Points
Incidental Benefit Rules• Defined benefit• Defined contribution• Seasoned and seeded money
Exit Strategies• Liquidation• Distribution• Sell to participant or trust*
Other Pertinent Points
Benefits• Safe Harbor guidance• Large income tax deductions• Self-completing• Creditor protected• Substitute business value
Considerations• Cost and administration• Consistent annual cash flow• Sensitive census• Insurability
Business Owner Retirement Builder
An Annuity Solution
Client Profile• Business owner seeking to become independent of business• Create more tax diversification at retirement• Contribute greater amounts to retirement than available under current plans• Flexibility of contributions in savings for retirement• Possible health impairment
Case Scenario
Robert — Business Owner• Seeks diversification for retirement plan• Wishes to become financially independent of his company • Plans to retire in 15 years• Seeks funding flexibility in saving for retirement• Possible health impairments
Business Owner Retirement Builder in Action
Lifetime Income with a Guaranteed Period of 10 Years based on Multiple Purchase Payments and an Income Start Age of 65
1. The Guaranteed Income Builder can present clients with some favorable tax treatment if they purchase the annuity with after-tax assets (non-qualified annuity), which Robert does in this scenario. This tax treatment is known as the exclusion ratio. The taxable portion of the income payment is determined by IRS rules. In essence, each income payment clients receive is composed of earned interest, which is taxable, and a partial return of the original after-tax purchase payment. Since clients do not have to pay taxes on the original purchase payment again, they will be able to spend more of their income. Once the non-taxable payments they receive equal the original after-tax purchase payment, all future payments they receive are 100% taxable as ordinary income. Different tax treatment applies to cash out payments from a non-qualified annuity.2. The annualized income percent is the annual income amount as a percentage of the purchase payment(s). Generally, the income will go down as the owner gets closer to turning on the income stream because the money won’t be held in the account as long. This is subject to fluctuating interest rates.
Year AgePurchasePayment
Annualized Incomeat Age 65
Cumulative AnnualizedIncome at Age 65
Annualized IncomePercent2
0 50 $35,000 $4,151 $4,151 11.86%1 51 $35,000 $3,977 $8,128 11.61%2 52 $35,000 $3,814 $11,942 11.37%3 53 $0 $0 $11,942 11.37%4 54 $5,000 $500 $12,442 11.31%5 55 $9,000 $864 $13,306 11.18%6 56 $15,000 $1,381 $14,687 10.96%7 57 $26,000 $2,293 $16,980 10.61%8 58 $35,000 $2,961 $19,941 10.23%9 59 $0 $0 $19,941 10.23%
10 60 $25,000 $1,926 $21,867 9.94%11 61 $35,000 $2,587 $24,454 9.59%12 62 $0 $0 $24,454 9.59%13 63 $25,000 $1,701 $26,155 9.34%14 64 20,000 $1,306 $27,461 9.15%
300,000 $27,461 9.15%15 65 – – –
Business Owner Retirement Builder
A Life Solution
Client Profile• Plans to retire in 15 years• Seeks diversification for retirement plan• Wishes to become financially independent of his company• Contributes greater amounts to retirement than under current plans on a
consistent basis• Seeks enhanced death benefit protection• Insurable
Business Owner Retirement Builder in Action
Year Age CumulativePremium
AnnualSurrender
Death Benefit
IRRD.B.
IRRC.V
1
15
66
51* 20,000 – – $508,409
CumulativeWithdrawals
65 $300,000 – – $686,755 – –
$32,102 $646,795 8.76 2.89
82 $545,734 $153,631 4.92 4.15
Promise Whole Life Select 65 Male Preferred NonsmokerUnless otherwise indicated the values below are non-guaranteed. For 2016, the declared dividend scale interest rate is 5.00%, which represents the investment income component in the determination of the dividend scale.Life illustrations show end of year however client is a 50 year old male, as shown in the previous annuity illustration.
Business Owner Retirement Builder
A Life and/or Annuity Solution.
Client Profile• Robert instead sells his business• Uses proceeds to fund life insurance and/or an annuity, taking advantage of
tax deferral for 10 years• Then accesses contracts for retirement in addition to other traditional qualified
plans
Benefits and Considerations: a Comparison
Annuity• Guaranteed income stream subject to exclusion ratio • Death benefit protection • Flexible contributions• Retirement diversification• True joint lifetime income protection for spouses• Independence from the business
Life• Non-guaranteed income stream subject to FIFO• Higher death benefit protection• Less flexible contributions• Retirement diversification• Independence from the business
Closing Remarks
Disclosure
Any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation. MetLife, its agents and representatives may not provide tax or legal advice. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances.
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