the power to help you succeed succession planning opportunities for small businesses a guide to...
TRANSCRIPT
The Power To Help You Succeed
The Power To Help You Succeed
Succession Planning Opportunities for Small Businesses
A Guide to Business Succession Planning
3 Topics
• How to Transfer your business
• Executive Compensation Plans for Owners and Key Employees
• Alternatives for Retirement Plans
Many of you are business owners who face various business planning issues which
include business succession planning
Why You Should Plan
• Help to ensure viability of business
• Provide cash for your family
• Avoid conflicts of interest– Remaining owners v. heirs
Importance of a Business Continuation Plan
What Heirs of Deceased Owner Want What Surviving Owners Want
Top dollar for your interests Minimum cost for your interest
Prompt settlement of the estate Prompt transfer of the business
Set value of business for estate tax purposes
Full control of the business – no interference from your family
Relief for family of worries regarding the business and its
creditors
Continuing line of credit
Retention of customers and employees
Closed Corporation or Family Business
Three Possible Buyers
1. Outside
2. Inside
3. Family
Closed Corporation or Family Business
Plan A
Sometime I will sell
Plan B
What if you don’t
Closed Corporation or Family Business
The Highest Taxed Business Transaction
Ever Anywhere!
Closed Corporation or Family Business
There is no such thing as new money in a buy sell.
Fact:
Seller Pays for it!
The Outside Buyer
72% of Business’s Sold to Employees
Employees have no money!Can increase employees income but no control!
The Inside Buyer Double Tax Buy Sell Problem
The 85¢ StoryBuyer- looks at business value recovering costs in 5-7 years.
$1 = Value of business
Seller Pays Capital Gains 15% (+ state)
Buyer has to have enough cash to net $1.00Math- Buyer TB 40% $1.70 X 40% = $1.00$1.70 - $1.00 = .70 .70 (Buyers Tax obligation) & .15 (sellers Tax obligation)= 85 ¢!
So it Costs 85¢ to transfer $1.00
What is Fair Market Value (FMV)
FMV = Book Value & Goodwill
Convert Goodwill
Today into
Supplementary Retirement Income
$1.00 = .60 & .40 -
Set Up a Defined Benefit Plan For Yourself
Planning Statistics
• Small business owners– Aging
• 39% of small business owners are age 50-65*
– Educated• 51% with college degree*
– Unprepared for business succession• 1/3 to 1/2 don’t have a business succession plan in place*• Only 1/3 of business owners successfully transition to a
second generation of ownership**
*Source – Lisa O’Day, Opportunities Abound In Business Continuation Planning, The National Underwriter Company (June 2002) at http://www.nationalunderwriter.com/archives/Lh_archive/2002/L02-11/L200206opportuities.**National Underwriter, February 2003.
“Triggering Events”
– Death– Retirement– Disability– Withdrawal before
retirement
Occurrences or Events that Can Disrupt Your Business
1) Establish a sinking fund– Adequate funding period?
2) Installment note– Liquidity for the decedent estate?– Future success of the business?
3) Life insurance
Methods to Fund a Buy-Sell
Funding a Buy-Sell
• Why Life insurance?
– Provides cash when needed• Tax-Free Death Benefit*
– Cash values available for lifetime buy-outs
*For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
• Three basic types of buy-sell structures:– Stock redemption– Cross purchase– Wait & see
• How to distinguish between them?– Look at who will be required to buy
(business, owner, combination of both)
Structuring the Buy-Sell
• Simple• One policy per owner• Business pays premiums• Cash value is a business asset (access to
cash values)• No real transfer for value issues
Stock RedemptionAdvantages
The Power To Help You Succeed
The Power To Help You Succeed
Case Studies
The “One-Person” Buy-SellFacts
• Single shareholder
• Wants longtime executive to continue business after death
• How does executive fund buy-out of current owner?
The “One-Person” Buy-SellStrategies
• Executive funds own buy-out– Executive pays premiums– Business not out any funds
• Bonus funds to executive for premiums– Business gets deduction– Issue: current owner funding own buy-out
Family Owned BusinessFacts
• Steve owns 100% of business
• Oldest daughter, Betty, is active in business
• Steve’s wife, Jenny, is inactive in business
• Steve wants – Betty to get business– Minimize estate taxes– Cash for Jenny
Family Owned BusinessStrategies
Jenny
Betty
Steve
Stock Transfers at Death
Stock Transfers at Death
Sells Stock to Betty
Sells Stock to Betty
Pays Cash for Stock
Pays Cash for Stock
Life Insurance Death Proceeds
1. Planning for Business Owners
Business Owner’s Goal Possible Solution What To Look For
Buy-Sell Planning Cross Purchase 3 or fewer shareholders When step-up in basis is crucial Business only has one current owner
Stock Redemption 4 or more shareholders Business needs access to policy cash
value
Family Buy-Sell Family-owned businesses Desire to pass business to next
generation
Insured Controlled Cross Purchase Partnerships or LLCs 3 or fewer partners
Cash Accumulation Executive Bonus High tax bracket C-Corporations Companies without a stable financial
history
Life Insurance Retirement Strategy (LIRS) Pass-through entities
Voluntary Deferral Low tax bracket C-Corporations Stable companies
Accounts Receivable Financing High risk businesses (e.g. doctors and
dentists) Partnerships and LLCs
For Broker Dealer Use Only. Not for use with the Public.
1. Planning for Business Owners (cont.)
For Broker Dealer Use Only. Not for use with the Public.
Business Owner’s Goal Possible Solution What To Look For
Key- Person ProtectionKey-Person Life Insurance Business would be hurt by death
of a key executive
Personal Life Insurance Protection Endorsement Split Dollar Low tax bracket C-Corporations
Business owners under 65
Executive Bonus High tax bracket C-CorporationsDesire to combine life insurance protection with cash accumulation
Estate PlanningILIT-Owned Non-Equity Collateral Assignment Split Dollar
Low tax bracket C-Corporations2nd to Die Policy
7872 Term Loans C-CorporationsInsured age 60+
Summary• Creating a Plan for Business Continuation
helps a business live beyond the death of an owner
• There is a variety of planning arrangements to fit the business needs
• Life Insurance provides cash for the purchase of a portion or all of a business at an owner’s death
• Want to feel good about retirement?• Start now since the inside buyers (kids) will
buy you out with your own money anyway!
The Power To Help You Succeed
The Power To Help You Succeed
Non Qualified Executive Compensation Plans
Employer and Employee Perspective
2828
Why Retention is important to the organization
Organizational Costs:
• Recruitment• Training• Socialization• Disruption• Indirect costs• Productivity losses• Workflow interruptions• Loss of expertise• Loss of business opportunities• Administrative problems• Job satisfaction of remaining employees• Image of organization• Possible competitor
Individual Employee Perspective:Individual Employee Perspective:
• Ability to obtain positionsAbility to obtain positions• Family well-beingFamily well-being• Financial stabilityFinancial stability• Emotional wellnessEmotional wellness
2929
Executive Challenges: Providing for Differing Needs
• Family protection
• Education
• Emergencies
• And possibly retirement– Qualified Plan limitations– IRA limitations– Social Security limitations
3030
Employer Challenges: Providing Attractive Benefits
• Competition
• Employee benefit limitations
• Cost
• Tax advantages to both employer and executive
3131
Nonqualified Deferred Compensation (NQDC)For Key Employees - Why?
• Qualified plans insufficient– “Maxed out”
• Need to attract and retain key-person– “Golden handcuffs”
3232
Owner and Executive’s Qualified Plan Situation
If you borrowed $1M what 2 pieces of information would you want to know?How about % rate and term of the loan?
If the lender told you they don’t need the money right now but will need it back sometime in the future, and will let you know sometime in the future the % rate,
would you cash in check?This is what the federal government has told our clients with Qualified Plans!
Nonqualified Deferred Compensation NQDC - Requirements
• Must be limited to key executives
• ERISA Top-Hat Group(case by case; employees making business decisions and in a position to
protect themselves)
• DOL and ERISA requirements
• Retirement Strategies- TPA
3535
Nonqualified Deferred Compensation NQDC - Requirements
• Plan assets must be reachable by business’ creditors– Unfunded: ERISA
• Vesting and substantial risk of forfeiture
3636
Nonqualified Deferred Compensation NQDC – 3 Types
• Voluntary Deferral Plan
• Supplemental Employee Retirement Plan (SERP)
• 401(k) Mirror Voluntary Deferral Plan
3737
Nonqualified Deferred Compensation NQDC - Types
SERP
• Unsecured promise to pay a future benefit
• Business establishes defined benefit
• Business makes all contributions
Nonqualified Deferred Compensation NQDC - Types
401(k) Mirror
• Similar to a qualified 401(k) plan– Executive salary deferrals– Employer matching – unlimited in scope
(Buy-sell-opportunities)
• Variety of market measures- sales division growth
- department success
3939
Specially Designed Life Insurance contract as a financial tool
• Cost recovery for the Corporation
• Tax-deferred growth• Tax-advantaged access to
policy cash values*• Tax-free death benefit**
***For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, ***For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
*Tax-free income assumes: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death or maturity; (3) *Tax-free income assumes: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death or maturity; (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC §§ 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.a modified endowment contract. See IRC §§ 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.
4040
Nonqualified Deferred Compensation NQDC
Retirement Strategies Administration
• Enrollment
• Receipt of elections
• Communication
• Calculation of benefits
• Payment of benefits
4141
Measuring the Executive’s Benefit
• For Defined Benefit:– Fixed amount– % of Income
• For Defined Contribution:– Contribution plus growth rate
4242
Vesting• Voluntary Deferral fully vested
• No legal limits with SERP vesting
• Vesting does not create any creditor protection for the business or the executive
4343
Executive Taxation
• Deferrals/contributions pre-tax to executive• Premiums/contributions not deductible
to business• Benefit pay out taxable to the executive and
may be deductible to the business– Can be installment or lump sum
• Spell out in the agreement
4444
Distribution of NQDC Benefits
1. Separation of Service
2. Death
3. Disability
4. Specified time or a fixed schedule
5. Change of ownership or effective control
6. Unforeseeable emergency(illness/accident ->financial hardship; participant/spouse/dependent)
4545
Sample Benefit Summary401(k) Mirror Voluntary Deferral Plan
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The Power To Help You Succeed
Controlled Executive Bonus Using a specially designed Life Insurance
contract as a financial tool
4747
Controlled Executive Bonus
• Employer’s Goal– Provide attractive benefits with a “golden
handcuff” to valued executive
4848
Controlled Executive Bonus
• Employee’s Goal– Life insurance protection and cash value
accumulation for emergencies, education, home purchase and retirement
4949
Controlled Executive Bonus
• Where to Use– Key-executive – S corps. and partnerships, any pass-
through organization or C corporation
5050
5151
Controlled Executive Bonus
• Issues– No employer reimbursement– No DOL– ERISA may apply
• Contact employee benefits advisor
5252
Controlled Executive Bonus: Features
• Bonus may be grossed-up to net premium after tax• Limited access to cash value for emergencies,
education, and possibly retirement• Death benefit for family protection• Personal ownership of life insurance will cause
inclusion of the death benefit in executive’s estate• The executive may never be able to reach to policy
cash value if they don’t meet the requirements of the vesting schedule
5353
Executive Summary: Taxation
• Bonuses taxed to executive• Potential tax-deferred growth of cash value• Possible income tax-free death benefit to
executive’s heirs*• Potential tax-free distributions from cash value**
**Tax-free income assumes: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death or maturity; **Tax-free income assumes: (1) withdrawals do not exceed tax basis (generally, premiums paid less prior withdrawals); (2) policy remains in force until death or maturity; (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not (3) withdrawals taken during the first 15 policy years do not occur at the time of, or during the two years prior to, any reduction in benefits; and (4) the policy does not become a modified endowment contract. See IRC §§ 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce become a modified endowment contract. See IRC §§ 7702(f)(7)(B), 7702A. Any policy withdrawals, loans and loan interest will reduce policy values and may reduce benefits.benefits.
*For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, *For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
5454
Employer Summary: Features and Taxation
• Control Executive’s access to policy cash value
• Bonuses possibly tax-deductible*
• Can limit participation to executives
* The deductibility of the bonus is subject to the reasonable compensation limits established by the Internal Revenue Code Section * The deductibility of the bonus is subject to the reasonable compensation limits established by the Internal Revenue Code Section 162(a).162(a).
Controlled Executive Bonus
Specimen Agreement
5656
Permanent Benefit Section 79 Using Life
Insurance
• All features of an Executive Bonus Plan for C-Corporations Plus the Bonus to the Executive gets a discount!
• This W-2 discount averages 40%!
• Plan is only funded for 5 years.
5757
How it Works-Permanent Benefit Sec. 79 Plan
EMPLOYEE’S BENEFICIARIESEMPLOYEE’S BENEFICIARIESEMPLOYEEEMPLOYEE
11
22 3344
- C Corp. establishes group term - C Corp. establishes group term plan under IRC Section 79plan under IRC Section 79
- Corporation pays premiums- Corporation pays premiums
Employee’s heirs will receive Employee’s heirs will receive the life insurance policy death the life insurance policy death benefit free of income tax*benefit free of income tax*
Death Benefit costs in Death Benefit costs in excess of $50,000 are excess of $50,000 are
taxable to employee using taxable to employee using Table I Costs Table I Costs
Cost of Cost of Permanent Permanent Benefit Taxed Benefit Taxed to Employeeto Employee
PERMANENT LIFE INSURANCE PERMANENT LIFE INSURANCE C CORPORATION C CORPORATION
For Broker Dealer Use Only. Not for use with the Public. For Broker Dealer Use Only. Not for use with the Public.
*For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be *For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2)( i.e. the “transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).“transfer- for- value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
Mark LaJoie
• Non Qualified Executive Compensation• Business Continuation/Living Buy Outs• Maximizing Wealth Accumulation• Asset Protection Planning• Estate planning ideas• How to preserve your qualified retirement plan
$10K x 35% TB x 30$10K x 35% TB x 30
IRS want the $3,500 of IRS want the $3,500 of apparent tax savings during apparent tax savings during the contribution years back the contribution years back at interest.at interest.
TRANSFERRED MONEYTRANSFERRED MONEY
Demograph XX is the necessary changes by the government to survive.
This will dramatically affect our personal retirement.
In 3,000 days 2/3’rds of now working population will be > 60 yrs old.
Less working taxpayers & more retirees living off government programs
Since 1990 a 12% increase in people over age 65
By 2040 the elderly will represent 20.7% of the total population
Since 1990 the fastest growing segment is ages 90-94 (44%!)
In the same time period 80-94 increased 25.7%
In 2000 a female 65 LE is 84.2 years, in 1900 LE was 47.3 years.
People retire $ moves from stock market to less risky investments
National Debt- August 1, 2006 $8,436,303,577,225.15
The Outstanding Public Debt as of 22 Apr 2009 at 10:48:21 PM GMT is:
US National Debt: $9,642,145,226,087
Your family’s share: $153,560
TRANSFERRED MONEYTRANSFERRED MONEY
Tracking your money