Solutions for your business
For your business to reach its full potential, you need to understand the financial tools at your disposal. We can apply our expertise to help your business succeed.
To run a successful business, you need to understand the financial choices available to business owners. At our firm, we apply our expertise, resources and tools to find long-term solutions that can help your business grow and succeed.
The key to protecting your business and your net worth.
Develop a strategy to preserve your business and your net worth
Effective business planning is both an "art" and a science. First and foremost, it is an art. Because the best business plan always considers your unique financial goals and objectives, creativity and customization is required to select and tailor those strategies best suited to meet your specific business continuation and benefit needs.
Business strategies and concepts that you should consider in your plan
These valuable concepts can help:
Split-dollar life insurance
Your corporation can help pay for an employee life insurance by covering a portion of the insurance premium. Premiums and death benefits are shared by the employer and employee. This cost-effective benefit can be valuable for key employees and select executives.
Section 303 stock redemption
Your business may be able to help you pay estate taxes and settlement costs if your stock is worth more than 35 percent of your adjusted gross estate. Under a Section 303 stock redemption, the business redeems some stock from your estate to produce cash to meet your estate's obligations.
How to use employee benefits to help increase income and improve retention of key employees
Qualified pension and profit-sharing plans
Sponsored retirement programs help employees prepare for retirement and allow them to take advantage of special tax breaks. Any contributions you make to the plan are tax deductible. Employees are limited in the amounts they can save for retirement in qualified plans. Nonqualified plans may allow associates to enhance their retirement benefits.
Golden Executive Bonus Arrangement(GEBA)
GEBA and other executive compensation strategies provide life insurance to employees and give your company a current income tax deduction.
Your business can provide a variety of programs, and the tax deductions generated by the premiums you pay can make this a cost-effective strategy.. Medical, disability and life insurance are the three more popular programs.
Key Person Life Insurance
Protect your business against the loss of key people.
Protect your business against the loss of one of your most vital assets: key employees
How Key Person Life Insurance works:
The employer pays premiums for a life insurance policy on the key employee's life. The employer is the owner and beneficiary.
The employer can arrange an Exchange of Insurance Agreement to reduce losses if a key employee leaves prior to retirement. This allows the employer to transfer coverage to a successor.
If you employ anyone whose sudden, unexpected absence would significantly impact your business, consult with your life insurance agent and financial professionals about Key Person Life Insurance.
* Subject to the corporate alternative minimum tax for C corporations.
Business estate planning
How to preserve your life's work.
You've spent a lifetime building your business. Take a moment to make sure that your hard work will survive the death of you or one of your partners.
As the owner of a closely-held business, much of your wealth is probably tied up in the business. While returning earned income back into the business helps finance growth, it can cause severe liquidity problems for your estate when you die. After paying probate and estate taxes, your estate and surviving family members also may encounter liabilities that become payable upon your death. They may also face the potential of decreased business earnings, due to your absence.
There are ways to overcome these liquidity problems. Incorporating estate planning in your business plan can help reduce estate taxes and make the best use of the cash available. The most common business estate-planning tools are buy-sell agreements, Section 303 stock redemptions, Section 6166 estate tax deferrals and the qualified family-owned business exclusion. Business-owned life insurance can be used to fund each of these planning methods.
Buy-sell agreements can establish the value of your business for estate-tax purposes and improve your estate's liquidity by assuring a ready market for your business upon your death. These agreements also protect business partners from sharing ownership with a deceased stockholder's family.
There are two main forms of buy-sell agreements: cross-purchase and stock redemption. In an insurance-funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner's share of the business.
In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. Here the business is the owner and beneficiary of life insurance policies on each shareholder. A partnership looking for a business continuation plan may use a similar arrangement called an entity purchase.
A buy-sell agreement that is funded with life insurance may benefit:
- Prevents conflict with surviving owners
- Help ensures that your family receives a fair price for your business
- May set the value of your business for estate-tax purposes
- Provides needed cash
- Keeps new and/or unwanted owners out of the business
- Prevents disputes
- Ensures continuity and orderly transfer of ownership
- May provide tax-free cash to purchase stock
Section 303 Redemptions
Section 303 of the Internal Revenue Code gives your estate a one-time opportunity to remove cash or other property from your business, at little or no tax cost, through a partial redemption of your stock. This can provide the liquidity your survivors need to pay funeral costs, estate and administrative expenses, and state and federal death taxes.
To be eligible for a Section 303 redemption, the stock value must exceed 35 percent of your estate. The maximum amount that can be paid under such a plan equals the total amount of the federal estate tax, state death taxes, funeral and administrative expenses. Corporate-owned life insurance can be used to fund the redemption. Under this arrangement, your business purchases an insurance policy on your life and at your death uses the tax-free proceeds to buy enough stock from your estate to cover death expenses and taxes.
An estate tax burden can force the liquidation of a closely-held business. Internal Revenue Code Section 6166 was designed to prevent this liquidation. If the business interest constitutes more than 35 percent of your adjusted gross estate, under Section 6166 the executor may elect to pay the estate tax attributable to the value of the business in 10 annual installments, beginning no later than five years after the date of your death.
There are a number of requirements you'd have to meet to be eligible for the Section 6166 extension. If your estate qualifies, life insurance offers an economical way to pay these installments.
Qualified Family-Owned Business Exclusion
If your business qualifies as "family owned," you may be able to exclude part of it from estate taxation. Your business qualifies as family owned if the business comprises more than 50% of your total estate and you pass the estate on to a "qualified heir." A qualified heir is generally defined as a spouse, child, grandchild or other descendent. Your heirs, however, should realize that they have to hang onto the business for at least 10 years following such an estate transfer. If they don't, they may have to pay the full estate taxes that were avoided. Life insurance can provide your heirs with the cash necessary to pay estate taxes whether or not you qualify for this exclusion.
Business Valuation for Estate Planning
No matter what technique you select for your company, determining the value of the business is a key step in the estate planning process. Why? First, in the case of a buy-sell agreement, you need to know the value of the business to determine the price and fund the agreement. Second, because the business is part of your estate, the valuation is needed to estimate the estate taxes; this helps you calculate the cash or liquidity needed to administer the estate. Finally, the value of the business must be reported on the estate tax return when the owner dies.
*Financial Advisors do not provide specific tax/legal advice and this information should not be considered as such. You should always consult your tax/legal advisor regarding your own specific tax/legal situation.
Prepare for the continued success of your business after you're gone.
Business planning can help you avoid the problems that can occur when a business owner dies. A life insurance funded business continuation plan may provide a wide variety of benefits for your family and the business.
For your family:
- Prevents conflict with surviving owners
- Assures a fair price for the business
- May set the value of your business for federal estate tax purposes
- Can provide cash for your estate
For the business:
- Allows you to maintain control of the business
- Prevents disputes
- Assures orderly transfer of the business upon death
- Provides an income tax-free death benefit to purchase shares of the business
Several business continuation options are available:
Cross Purchase Agreement
An agreement between co-owners of a business. Surviving owners purchase pro rata shares of the deceased owner's share of the business. To fund the purchase, each co-owner owns, pays premium on and is the beneficiary of an appropriate amount of life insurance on the other owners.
Stock Redemption/Entity Purchase Agreement
The business becomes obligated to purchase the stock or partnership share of a deceased shareholder or partner. The business owns, pays premium on and is the beneficiary of life insurance on each shareholder or partner.
LifeCycle Buy-Sell Agreement
Combines the benefits of the traditional stock redemption and cross purchase methods. Provides several benefits, including the ability to supplement retirement income and allocate the premiums as desired.
Section 303 Stock Redemption Provision
A special type of stock redemption provision that can provide cash to the estate of a deceased shareholder in a tax-favored manner. Allows a corporation to redeem a deceased shareholder's stock without incurring income taxable dividends. The potential for dividend taxation upon a stock redemption exists when a business is passed on to surviving family members.
One-Way Buy-Sell Agreement
Allows a single key employee or an outsider to purchase the business outright from the business owner's family using the death proceeds from a life insurance policy following the business owner's death.
Consult your financial Advisor,attorney and other financial professionals for more information about creating a Business Continuation Plan that's right for you.
Executive Bonus Strategy
Reward key employees with life insurance paid with deductible business dollars
Your key employees are an important reason that your business is profitable. Employers often use selective, discriminatory fringe benefits to reward those employees whose work is more responsible for creating profits. An Executive Bonus Arrangement is one of these selective benefits.
How an Executive Bonus Arrangement works:
- The employee takes out a personal life insurance plan and names a beneficiary.
- The business pays the policy premium as a bonus to the employee. It can deduct the premium on its income taxes as long as the total payments to the employee are considered reasonable compensation.
- The employee pays income taxes on the premium
Benefits for the company and key employees
- Advantages to the company include:
- Easy administration
- Premium payments are deductible expenses
- IRS qualification/reporting is not required
- You select participants
- It is relatively inexpensive
- You can terminate the arrangement at any time
Advantages for key employees include:
- A portion of your life insurance premium is covered by your employer
- The employee's beneficiary receives an income tax-free death benefit
- They own and control the policy and its cash values
- It is portable — they can take it with them when they leave the company
An Executive Bonus Plan can be a cost-effective method to reward employees whose hard work helps make your business profitable. Only highly compensated employees or management may participate in an Executive Bonus Plan.
The Golden Executive Bonus Arrangement
Protecting key employees with life insurance.
A compensation arrangement designed to reward select executives with cash value life insurance
Attracting, motivating and retaining key executives takes a competitive compensation package that includes more than a salary and a bonus.
The Golden Executive Bonus Arrangement (GEBA) can be a solution for rewarding and retaining your most valued executives. This arrangement gives your company a current income tax deduction through the purchase of cash value life insurance, while maintaining control to encourage an executive to stay with your company.
Other advantages of life insurance funded GEBA include:
- You decide who participates
- You can tailor it to the needs of each executive
- You can adjust the benefit to meet your future needs
- It is easy to get started
If you're looking for an executive compensation bonus arrangement that helps you retain one or more key executives, consider using life insurance in a GEBA.
Disclosure: Please keep in mind that the primary reason to purchase a life insurance product is the death benefit. Life insurance products contain fees, such as mortality and expense charges (which may increase over time), and may contain restrictions, such as surrender periods. One can lose money in this product. Policy loans and withdrawals may create an adverse tax results in the event of a lapse or policy surrender, and will reduce both the cash value and the death benefit. Depending on the actual policy experience, the Owner may need to increase the premium payments to keep the policy in force. Separate from the financial / business plan and our role as financial planner, we may recommend the purchase of specific investment or insurance products or accounts. These product recommendations are not part of the financial/business plan and you are under no obligation to follow them.