Business Planning Strategies

The successful business ownerStrategies for effective business planning

A Reference Guide for Business Owners

Contents 1 | Know what it takes to build a successful business 2 | Attract and retain key employees 5 | Protect the business you have worked so hard to build 8 | Cross Purchase Buy-Sell Agreements 9 | Entity Buy-Sell Agreements

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION • NOT FDIC OR NCUA INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY •

NOT GUARANTEED BY ANY BANK OR CREDIT UNION

1

Ask yourself these important questions:• DoIknowwhatwillhappentomybusinesswhen

Iretire?

• Ismybusinesscapableofcontinuingitssuccess

intheeventofmyormypartner’suntimelydeath

or disability?

• Ismyfamilyadequatelyprotectedifsomething

weretohappento me?

• HaveIdoneeverythingIcantoattract,retain

andrewardthekeyemployeesthatarecriticalto

mybusiness?

Ifyouanswered“no”toanyofthesequestions,youmaywant

toconsiderimplementingaformalbusinessplanningstrategy.

Properplanningcanhelpyouprotectyourbusiness,attract

andretainkeyemployees,andhelpensurethatyourbusiness

transfersinthemannerthatyouchoose.

Take the steps necessary to protect your most valuable assetsStartbyexploringallyourprotectionoptions.Thendevelopa

long-termstrategythatcanhelpprotectthecontinuityofyour

businessifyou,apartner,orkeyemployeedecidestoretireor

leavethebusiness,becomesdisabled,ordiesunexpectedly.

MassachusettsMutualLifeInsuranceCompany

(MassMutual)understandstheneedsoftoday’sbusiness

owners–wehavebeenworkingwithbusinessownersfor

over160years.Ourfinancialprofessionalswilltakethe

timetolisten,learnaboutyouandyourenterprise,andhelp

youdevelopstrategiesthatarebestsuitedtoyourneeds.

Considertheinformationonthefollowingpagesandtalkto

yourMassMutualfinancialprofessionalabouthelpingyou

designastrategythatmayprotectandensurethecontinued

successofyourbusiness.

Know what it takes to build a successful business

It takes vision, preparation, skills and desire – not to mention a focused dedication to achieving your goals. If you are like most business owners, you have worked hard and made many sacrifices to grow your business. That is why you should put just as much energy into protecting it as you did building it.

2

Intoday’shighlycompetitiveexecutivemarketplace,itis

becomingincreasinglymoredifficulttoattractandretaintop

talent.Salaryisnolongertheonlycompensationdriver.These

astuteindividualsalsolookatanemployer’soverallbenefits

packageanditspotentialtohelpaddresstheirrealconcernsof

financiallyprotectingtheirfamilies,inadditiontoadequately

planningforretirement.Theseconcernsareheightenedby

ever-changingtaxlaws,pensionplanuncertainties,andSocial

Securityshortfalls.Thegoodnewsisyoucanofferinsurance

andretirementbenefitsthatcanmakeadifferenceforboth

yourexecutivesandyourbusiness.*

Youprobablyalreadyhaveastandardbenefitspackage

inplace–onethatincludesmedicalanddentalcoverage,

disabilityincomeinsurance,andaretirementplan.However,

yourcompetitorsmorethanlikelyofferasimilarbenefits

package.Thesedays,employeesarelookingforspecial

benefitplansaboveandbeyondthestandardpackagesmost

employersalreadyoffer.Thesebenefitsoftenprovidethe

primaryincentiveforkeyemployeestojoinandremain

loyaltoyourcompany.

Thefollowingdescribessomeincentivebenefitplansthat

youcanoffertoyourkeyemployees.Whattheyallhavein

commonistheirabilitytoattractandretainkeypeople.In

addition,theymayevenbeofbenefittothemostimportant

personinthebusiness–you!

Nonqualified Deferred Compensation Plans (NQDC)NQDCPlansaredesignedtoprovideextraretirementbenefits

forkeyemployeesaboveandbeyondwhatcanbeprovided

withqualifiedpension,profitsharing,or401(k)plans.You

canchoosewhichemployeesaretobecovered,theamount

ofbenefittobeprovided,andwhetherthebenefitissubject

toavestingschedule.Infact,youcanusethistypeofplan

justlikeitisusedbylarge,publicly-ownedcorporations–to

rewardandattractemployeeswith“goldenhandcuffs.”

NQDC Plans are ideally suited to employers that:

• Wanttoprovideadditionalretirementincometo

select,highly-compensatedemployees;

• Haveastable,maturecorporationthatislikelytobe

inexistencetopaytheretirementand/ordeathbenefit

aspromisedbytheNQDCPlan;and

• Havekeyemployeeswhohavemaximized

contributionstotheirqualifiedretirementplans.

Theseplanscanbe,andoftenare,supportedbylife

insurancethatispaidforandownedbythebusiness.Life

insuranceprovidesadeathbenefitandcanbeasafewayto

provideincometokeyemployees.Overtime,itcanprovide

livingbenefitsfromtheaccumulatedcashvalueandcanbe

aneffectivewaytoprovidesupplementalretirementincome1

fortheemployee,whilethedeathbenefitcanbepaidtothe

employee’sfamilywhentheindividualdies.Inaddition,the

plancanbestructuredsothatyourecoverthepremiumsyou

paidintothepolicy(requiresahigherdeathbenefitamount).

Attract and retain key employees

* There may be implications under the Employment Retirement Income Security Act (ERISA) depending on how certain types of insurance policies are made available to employees and whether such an arrangement constitutes an “employee benefit plan” under ERISA. Employers should consult their own tax and legal advisors for further information on potential ERISA implications.

1 Distributions under the policy (including cash dividends and partial/full surrenders) are subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

3

Theretirementbenefitordeathbenefitistaxdeductibleto

thecompanywhenpaidoutandtaxabletotheemployee

orhisorherfamilywhenpaidoutasasalarycontinuation

retirementbenefit.

Split Dollar PlansSplitDollarPlansareacost-andtax-effectivemethodof

providingmultiplebenefitsusinglifeinsurance.SplitDollar

getsitsnamebecauseitinvolvessplittingthebenefitsofalife

insurancepolicybetweenyouandyourkeyemployee.Here

ishowittypicallyworks:

• Youpaythepremiums.

• Therearetwotypesofownership:

– Endorsement: Youarethepurchaserandowner

ofthepolicyandthereisanagreementbetween

youandtheinsuredemployeethatdefinesthe

portionofthepolicydeathbenefitthatwillbe

paidtotheemployee’sbeneficiary.

– Collateral Assignment:Youremployee

purchasesthepolicyandistheownerofthe

policy.Theemployeethenmakesacollateral

assignmentofthepolicytoyouinreturnfor

youpayingallofthepolicypremiums.

• Youareentitledtoallofthepolicy’scashvalue.2

• Whentheemployeedies,youcanrecoupthe

premiumsyoupaidintothepolicyorreceive

anamountequaltothetotalcashvaluethathas

accumulatedinthepolicy,whicheverisgreater.

• Thebalanceofthedeathbenefitisgenerallypaid

totheemployee’sbeneficiary.

2 Cash value is a feature of permanent life insurance.

Alternatively,thearrangementcanbestructuredasaSplit

Dollarloaninwhichyoulendtotheemployeealloraportion

oftheannualpremium.Youareentitledtothecashvalueor

deathbenefitequaltotheoutstandingloanamount.

ASplitDollarPlanistaxeffectivefortheemployee.

Insteadofpayingfullpremiumswithafter-taxdollars,

theemployee’sannualcostislimitedtoataxableeconomic

benefitbasedontheemployee’sshareofthedeathbenefit.

Inaddition,thedeathproceedsreceivedbytheemployee’s

beneficiaryaregenerallyincometaxfree.

4

Retirement Contribution ProtectionIfyou,yourpartners,oremployeesbecometotallydisabled

beforereachingretirementage,eachofyoumaynotonly

loseyourabilitytoearnanincome,butalsotheopportunity

toaccumulateadditionalfundsforretirement.MassMutual

canhelpaddressthisneed.

RetireGuard®canhelpreplaceanamountequaltothe

retirementplancontributions(includingboththeemployee’s

andthebusiness’scontributions)thatwouldhavebeenmade

toaneligibledefinedcontributionplaniftheparticipant

hadnotbecomedisabled.Itisnotaretirementplanora

substitutionforone.Duringaperiodoftotaldisability,

MassMutualwillpaybenefitsintoanirrevocabletrustthat

offersdifferentinvestmentoptionstohelpmeetthatperson’s

retirementgoals.

Executive (Section 162) Bonus PlansAnExecutive,orSection162,BonusPlanisatypeof

incentiveplanwherebythebusinessprovidesanexecutive

withfundsthatareusedtopurchasealifeinsurance

policyownedbytheemployee.Yourbusinesspaysthe

lifeinsurancepremiumdirectlyorindirectlythrougha

salarybonus.Youcanchoosewhichemployeesreceivethis

incentive,buttheemployeeownsallofthepolicy’scash

valueandhe/shechoosesthebeneficiary.Thereareoptional

arrangementsthatcanrestricttheemployee’saccesstothe

cashvaluesuntilretirement.

Executive Bonus Plans are recommended when:

• Akeyemployeehasaneedforlifeinsurance;

• Youarelookingforadditionaltaxdeductions;and

• Youwanttoprovidekeyemployeeswithabenefit

inadditiontoaqualifiedretirementplan.

Thebonusamountyoupayisfullytaxdeductibletothecompany,

providedthisisconsideredreasonablecompensation,andtaxed

asordinaryincometotheemployee.Youhavetheoptiontowork

outanarrangementwiththeemployee,suchasofferingaloan,to

helpcovertheincometaxliability.

5

Youhavebuiltyourbusinesswiththehopethatitwill

withstandthetestoftime.Unfortunatelytherearealot

ofelementsoutofyourcontrolthatcanaffectthesuccess

ofyourbusiness,suchasanunstableeconomy,alackof

consumerspending,andincreasedcompetition.

Thinkaboutwhatwouldhappentoyourbusinessifyou,your

businesspartner,orakeyemployeeweretounexpectedly

dieorbecometoosickorinjuredtowork.Thereisnodoubt

thatthiswouldhaveahugeimpactonyourbusinessandits

continuedsuccess.Butthereisgoodnews:thisissomething

youcanplanfor.

Thefollowingaresomecommonbusinessplanning

strategiesdesignedtoprotectyourbusiness.Justasyou

wouldinsureyourbusinessproperty,youshouldalso

considerinsuringthepeoplewhomakethebiggest

impactonyourcompany’ssuccess.

Key Person InsuranceKeypersoninsurancecanhelpofferpeaceofmindin

knowingthatthefinancialstabilityofyourbusinessis

protectedintheeventofavaluedemployee’suntimelydeath.

Basically,youpurchasealifeinsurancepolicytocover

thelifeofthatindividual,namingyourbusinessasthe

beneficiary.Ifthekeyemployeedies,thepolicyproceeds

arepaidbacktothebusinesstohelpkeepitgoingwhile

youseektofillthevoidleftbythedeceasedemployee.

Thisarrangementisideallysuitedforbusinesseswith:

• Owners,partnersorexecutivesthathaveadirect

impactoncompanyearnings;

• Salespeoplewhocontinuallyexceedgoalsorhave

relationshipswithimportantclients;and

• Individualswhohavespecializedskillsortechnical

knowledgethatcannoteasilybereplaced.

Premiumsforkeypersoninsurancearenottaxdeductible

sincethebusinessisthebeneficiaryofthedeathbenefit.

Proceedsaretypicallyexemptfromfederalincometax,

however,deathbenefitproceedsmaybesubjecttothe

corporateAlternativeMinimumTax(AMT)ifyour

businessisstructuredasacorporation.

Qualified Sick Pay Plan (QSPP)AQualifiedSickPayPlansetscompanypolicybeforean

employeedisabilityoccurs.Itestablisheswhotopay,how

muchtopay,whentostartpayments,andhowlongtopay.

Theplanmustbeinstitutedpriortoanemployeebecoming

disabledandtheemployeemustbeawareofthetermsofthe

plan.Itmustalsobeinwritingandtheboardofdirectorsor

partnershipmusthavearesolutionadoptingtheplan.

YoucanfundyourQSPPwithadisabilityincomeinsurance

policyissuedoneachemployeetobecovered,whichallows

youtoavoidhavingtopaydisabilitybenefitsoutofyour

company’sassets.Thistransferstherisktotheinsurance

carrier.Theinsurancecompanydetermineseligibilityfor

benefitpayments,processestheclaims,andprovidesall

insuredbenefits.Thisalsoenablesyoutobudgetforthe

disabilitywhileyouandyouremployeesarehealthyandto

deductthepremiumasanecessarybusinessexpense.

Protect the business you have worked so hard to build

6

Individual Disability Income InsuranceDisabilityincomeinsuranceprovidesmonthlybenefitsto

helpyouasabusinessownerandyouremployeesmaintain

theirstandardoflivingwhileunabletoworkduetoillness

orinjury.Premiumdiscountsmaybeavailableforbusinesses

withthreeormoreemployees.3

Supplemental Disability Income InsuranceAsabusinessowner,youhavetheoptionofproviding

youremployeeswiththeopportunitytoapplyfor(or

decline)supplementaldisabilityincomeinsuranceon

eitheravoluntaryoremployer-paidbasis.Supplemental

disabilityincomeinsurancesupplementsyourexisting

grouplong-termdisabilityincomeinsurance(LTD),

helpingtoreducethegapbetweenLTDbenefitsandyour

employees’pre-disabilityincome.Supplementaldisability

incomeinsurancecanhelpyouremployeesmeettheir

incomeprotectionneeds.Inaddition,offeringsupplemental

disabilityincomeinsurancehelpsattractandretainquality

employeesandexecutivesbyaddingtoyourofferings.

InsurancecanbeofferedonaGuaranteedStandardIssue

(GSI)basisforbusinesseswith10ormoreeligibleemployees

foremployer-paidcoverage(75ormoreeligibleemployees

forvoluntarycoverage).GSIprovideseligibleemployees

theopportunitytoapplyforanindividualdisabilityincome

(IDI)insurancepolicywithsimplifiedunderwriting.Ifan

eligibleemployee4hasbeenactivelyatworkforatleast90

days,isnotcurrentlydisabledorreceivingdisabilitybenefits,

hasnotbeenhospitalized,isaU.S.citizenorpermanent

residentvisaholderlivingandworkingintheU.S.,and

financiallyqualifies,MassMutualguaranteestoofferanIDI

insurancepolicywithaspecificmaximummonthlybenefit

amount,waitingperiod(eliminationperiodinCA),and

benefitperiodatstandardratestothatemployee.

Business Overhead Expense (BOE) Abusinessoverheadexpensedisabilityinsurancepolicy

reimbursesbusinessownersforexistingoverheadexpenses

incurredwhiletheyaredisabled,keepingthecompanyup

andrunningwhiletheownerrecovers.Regularexpenses

thatcouldbecoveredunderaBOEpolicyincludeemployee

salaries,rent,leases,andutilitiestonameafew.And,BOE

premiumsaregenerallytaxdeductibleasabusinessexpense.

Buy-Sell AgreementsIntheeventofabusinessowner’sdeathordisability,a

Buy-SellAgreementwilldefinethetermsofthebuyout

oftheowner’sinterestinthebusiness.Byestablishinga

Buy-SellAgreement,youcanhelpensureasmoothtransition

ofownership,withminimaldisruptiontotheday-to-day

activitiesofthebusiness.

AneffectiveBuy-SellAgreementmustestablish:

• Whowillpurchasethedecedent’sordisabled

owner’sshareofthebusiness;

• Atwhatpricethedecedent’sheirsorestatewill

selltheshare;and

• Whenthesalewilltakeplaceandhowitwill

befunded.

Lifeanddisabilityincomeinsurancecanbeusedtofund

theBuy-SellAgreement.Ineithercase,thetotalamountof

insuranceshouldapproximatetheanticipatedpurchaseprice

oftheinsured’sshareofthebusiness.

3 Discounts subject to underwriter approval and state availability.4 MassMutual may establish additional eligibility requirements for a GSI offer.

7

Ina Cross Purchase Buy-Sell Planeachbusinessowner

purchasesalifeordisabilityinsurancepolicycoveringthe

lifeofeveryotherowner.Eachbusinessownerpaysthe

premiumsandisthebeneficiaryofthepoliciesthathe/she

ispurchasing.Ifanownerdies,thesurvivingownersuse

thelifeinsurancedeathbenefittopurchasethedeceased

owner’sinterest.Ifanownerbecomesdisabled,theBuy-Sell

Agreementprovidesanagreeduponpaymenttothedisabled

ownerforhisorherinterestinthebusiness.

InanEntity/Stock Redemption Buy-Sell Planthebusiness

purchasesalifeordisabilityinsurancepolicycoveringeach

owner.Thebusinesspaysthepolicypremiumsandisthe

beneficiaryoneachpolicy.Ifoneoftheownersdies,the

deathbenefitfromhis/herpolicyispaidtothebusinessto

purchasethatowner’sinterestinthecompany.Ifanowner

becomesdisabled,theBuy-SellAgreementprovidesan

agreed-uponpaymenttothedisabledownerforhisorher

interestinthebusiness.

Thechartsonthefollowingpagesprovidesomeguidance

tohelpyoudeterminewhichBuy-SellPlanmaybemost

suitableforyourbusiness.

8

Cross Purchase Buy-Sell Agreements

Cross Purchase Buy-Sell Agreements

EACH OWNER purchases a life or disability insurance policy covering every other owner.

Business

· Premiums paid personally by each individual owner are not tax deductible.

· A Split Dollar Plan or Executive Bonus might be used for the business to pay the premiums.

Business

· Owners may use a “trusteed” Cross Purchase Agreement. – The trustee acquires and owns life or disability insurance on each owner, reducing the number of policies

to the number of owners. – In the event of death, the trustee collects the life insurance policy proceeds, pays the proceeds to the

deceased owner’s estate, and transfers the deceased owner’s shares to the surviving owners in the appropriate proportions.

– In the event of disability, a Buy-Sell Agreement provides an agreed-upon payment to the disabled owner for his or her interest in the business.

Deceased owner’s estate

· Generally, the proceeds from a life insurance policy paid to a deceased business owner’s estate for his/her interest will be income tax free.

· The policy owned by the decedent on the lives of the other owners may be purchased or surrendered.

Surviving owners

· Policy proceeds are generally received income tax free, subject to rules regarding transfer of policies for a valuable consideration.

EACH OWNER pays the premium on the policies.

Massachusetts Mutual Life Insurance Company underwrites the policy application and, if approved, issues the life or disability income insurance contract.

· Each business owner owns a policy on the other business owners. • The policyowner is the beneficiary.

How it works

Tax considerations

Advantages

9

Entity Buy-Sell Agreements

5 Death proceeds from life insurance contracts owned directly or indirectly by an employer insuring the lives of its employees are taxable to the employer unless certain notice and consent requirements are met. See IRC Section 101(j).

6 Distributions under the policy (including cash dividends and partial/full surrenders) are subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.

Entity Buy-Sell Agreements

BUSINESS purchases a life or disability insurance policy covering each owner.

Business

· Premiums are not tax deductible, but the death or disability proceeds are generally exempt from federal income tax. (Note: Some C corporations may be subject to corporate Alternative Minimum Tax on a portion of the proceeds.)

· If a corporate stock redemption agreement is used, there is generally no increase in basis for a surviving owner’s interest (surviving owners of S corporations, partnerships, and LLCs can obtain a partial or full step-up). This differs from a Cross Purchase Buy-Sell Agreement.

Business

· Cash values in life insurance policies are available as reserve funds for the business entity.6

· This type of Buy-Sell Agreement is preferable when there are many business owners (business owns just one policy for each owner) or when there is a wide range of ages among business owners (in other types of Buy-Sell Agreements, younger owners pay higher premiums on the policy of an older owner).

· Establishing a price for the business in a Buy-Sell Agreement among owners who are not related may fix the value for federal estate tax purposes.

· If a death or a disability of a partner occurs, the policy proceeds are paid to the business and are generally income tax free.

Insured

· There is no tax implication. · Generally, the redemption of the

decedent’s business interest is income tax free to his/her estate or heirs. However, redemption of stock may be taxed as a dividend in certain family-owned cases.

BUSINESS pays the premiums.

Massachusetts Mutual Life Insurance Company underwrites the policy application and, if approved, issues the life or disability income insurance contract.

· The business entity is the policyowner. • The business entity is the beneficiary.

How it works5

Tax considerations

Advantages

Insurance products are issued by Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001.

RetireGuard can be issued on a stand-alone basis or as a rider on a disability income contract for an additional cost. Benefits are not paid into an employer-sponsored retirement plan. When insured with RetireGuard, during a period of total disability, MassMutual will pay benefits into an irrevocable trust. The trust offers different investment options so that a client can select the option that best meets his/her retirement goals. Trust assets may be tax-deferred depending on the investment option(s) selected. Trust services provided by The MassMutual Trust Company, FSB, a wholly-owned subsidiary of MassMutual. Not all policies and riders are available in all states. This policy is issued by Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. This policy has exclusions and limitations. For costs and complete details of coverage call your agent or MassMutual at 1-800-272-2216 for a referral to an agent.

LI8502 1013 CRN201511-176609

© 2013 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.

There are many reasons to choose a life insurance company to help meet your financial needs: protection for your family or business, products to provide supplemental income and the confidence of knowing you will be prepared for the future.

At Massachusetts Mutual Life Insurance Company (MassMutual), we operate for the benefit of our participating policyowners. We stand strong in the fundamental belief that every secure future begins with a good decision. And when choosing a life insurance company – ownership, strength and stability matter.

Learn more at www.massmutual.com/mutuality

MassMutual. We’ll help you get there.®