business owner insurance planning by mark simon

Planning For Planning For Business OwnersBusiness Owners

Presented by:Mark L. SimonFinancial Services ProfessionalCalifornia Insurance License No. 0E41454

Benefits For:Benefits For:

You and your key persons onlyAll of your employees

Benefits For You Benefits For You & Your Key People:& Your Key People:

Supplemental executive retirement plan (SERP)

Executive bonus plan

Split-dollar insuranceBuy-sell fundingKey person

protectionDisability income

insuranceEstate planning

Benefits For All Employees:Benefits For All Employees:

Qualified pension plansGroup life and health

insurance

Ideal Fringe Benefit Ideal Fringe Benefit From a Tax StandpointFrom a Tax Standpoint

Current tax deductions for the business

Deferred tax to recipient

Cost to CorporationCost to Corporation

Corporate Tax Bracket (%)

Tax-deductible Corp. Dollar

After-tax Cost

34% $1.00 $.66

15% $1.00 $.85

Tax-Deductibilityis only one factor to be

considered

Ideal Fringe Benefit Ideal Fringe Benefit From a Planning From a Planning StandpointStandpoint

Relieves an employee of a personal non-deductible expense

Income Tax RatesIncome Tax Rates

Affect business planning

Personal Tax Bracket vs.Personal Tax Bracket vs.Corporate Tax BracketCorporate Tax Bracket

Benefit Planning Benefit Planning Key Questions:Key Questions:

1. Is it deductible?

2. Who controls benefit values?

What is Most What is Most Important to You?Important to You?

Tax-deductibilityor

Control of benefit

Types of BusinessTypes of Business

Sole proprietorshipPartnershipC corporationS corporationProfessional corporationLimited liability company (LLC)

Sole ProprietorshipSole Proprietorship

A business owned entirely by one person

PartnershipPartnership

An association of two or more persons as co-owners of a business for profit

CorporationCorporation

A separate legal entity apart from its owners

S Corporations Enjoy:S Corporations Enjoy:

Limited liabilityEmployee benefit advantages (for non-shareholders)

S CorporationS Corporation

Taxed like a partnership

Professional CorporationsProfessional Corporations

Organizations of physicians, lawyers and other professional people

Treated as a corporation for tax purposes

Not taxed the same as C corporations

Can elect S corporation status

Limited Liability CompaniesLimited Liability Companies

An LLC member’s potential liability is limited

LLCs are not burdened by ownership restrictions applicable to S corporations

LLCs may have more than one class

of stockPreferred allocations of profits and losses are allowed*LLC law is relatively new and uncertain.

Consultation with an LLC expert in your state is recommended.

Choosing the Form of Choosing the Form of Business OrganizationBusiness Organization

TaxationLimited liabilityEmployee benefits

Key Person InsuranceKey Person Insurance

Who is a Key Person?Who is a Key Person?

High salary levelDecision-making powerAbility to implement plansFinancial leverageSpecial talent

ProblemsProblems

Disruption of managementReduction in earningsImpairment of creditLoss of confidenceReplacement costs

How Key Person How Key Person Insurance WorksInsurance Works

Key Employee

Business

Premiums

Death Benefits

•Business owns and controls the policy.

•Business is the premium payor and policy beneficiary.

•Business receives tax-free death benefits.

Adopt A Adopt A Corporate Resolution Corporate Resolution

Why?To fully protect

your business

Executive Executive Fringe BenefitsFringe Benefits

Supplemental Supplemental Executive Retirement Executive Retirement PlanPlan

Split-DollarSplit-DollarCustodial Executive Custodial Executive

BonusBonusExecutive BonusExecutive Bonus

EMPLOYEREMPLOYERCONTROLCONTROL

Is Control Important?Is Control Important?

Supplemental Executive Supplemental Executive Retirement Plan (SERP)Retirement Plan (SERP)

Golden Handcuffs

SERP DefinedSERP Defined

“A contract between an employer and an employee to provide retirement and perhaps death and/or disability benefits to select employees”

Life insurance is purchased on the employee’s life to assist employer in meeting future

obligations

SERPs Help Complete the SERPs Help Complete the Retirement PictureRetirement Picture

Soc. Sec.Investments

PolicyBenefits

Premiums

Agreement

Retirement and/or

Disability $BusinessBusiness ExecutiveExecutive

Death Benefits

BeneficiarBeneficiaryy

Step1Step1

Step 2Step 2 Step 3Step 3

Step 4Step 4

Step 5Step 5

How it WorksHow it Works

Ins Co.Ins Co.

AdvantagesAdvantages

Places “golden handcuffs” on key employees

Attracts the best of the best and gives key employees an incentive to stay

Flexible benefitsPick and choose participantsCorporation can recover its costsMinimal compliance issues

SERPs and TaxesSERPs and Taxes

Tax Consequences

Today At Retirement

Employer No deduction Deductible

Employee No tax consequences Taxable income

Accounting for Accounting for SERPsSERPs

Funding vehicle carried as asset on corporate books

Promise to pay benefits is a corporate liability

Split-Dollar InsuranceSplit-Dollar Insurance

OwnershipBenefitsPremium

An insurance policy is “split” between the business and the

individual

Split-Dollar ApplicationsSplit-Dollar Applications

Fringe benefitEstate liquidityBuy-sell planningGroup term replacement

Split-DollarSplit-Dollar

…a versatile fringe benefit that permits the acquisition of needed life insurance at a reduced cost

Premium SplitPremium Split

Employer

Employee

Death Benefit Death Benefit SplitSplit

Employee’s Beneficiary

Employer

Split-dollar is also used to share policy cash value between an employer and an employee

Choices!Choices!Economic Benefit Plan

Loan Plan

Policy Owner Employer EmployeeEmployee’s Cost Annual term value

of death benefitAnnual imputed interest income

Policy Cash Values

Employer owns entire cash value

Employee owns cash value exceeding employer’s premiums

Employer’s Share of Death Benefit

Greater of total premiums paid or policy cash value

Total premiums paid

Employee’s Share of Death Benefit

Balance of death benefit

Cost Recovery When plan ends When plan ends

Rollout at RetirementRollout at Retirement

Employer receives its premium payments back

Employee receives policy (minus employer’s premium)

Tax ConsequencesTax Consequences

Employer: No deduction, but owns the cash value

Employee: Taxed on economic benefit and any

cash values received

Retirement PlanningRetirement Planning

What have you done?

Could you do more?

Would you be interested in tax-advantaged

retirement cash flow?

Would you be interested in a plan where values

grow tax-deferred?

Would you be interested in a plan that allows you to

exclude all of your employees?

Would you be interested in a plan with minimal government rules or

regulations?

Your PlanYour Plan

Utilizing the advantages of permanent life insurance

Permanent Life InsurancePermanent Life Insurance

Policy cash values grow tax deferred

As long as the policy remains in force, withdrawals up to basis and loans are tax free

Take Care of YOUR

Retirement Needs!

Executive Bonus PlanExecutive Bonus Plan

Compensates select key employees using life insurance

Simple to install Costs of the plan are tax-deductible

How it WorksHow it Works

Business pays premium

Business receives current tax deduction

Insurance policy is purchased

BusinessExecutive

Income tax free Death benefit

Ins Ins Co.Co.

Premium is taxable bonus

Executive owns policy

•Executive is taxed on bonus

• Cash values build tax-deferred (as long as policy stays in force)

•Policy cash values available for retirement or college funding

•Cash values may be creditor protected (varies by state)

•Death benefits may be used for estate settlement

Executive Bonus PlanExecutive Bonus Plan

Tax Consequences

Today At Retirement

Employer Deductible Not applicable

Employee Taxable Income Tax–free

retirement income*

Under current tax law

How Custodial Executive How Custodial Executive Bonus WorksBonus Works

Business pays premium

Business receives tax deduction

Insurance policy is purchased

Business Executive

Income tax free death benefit

Ins Ins Co.Co.

Premium is taxable bonus

•Cash values build tax-deferred (as long as policy stays in force)

•Accumulated cash value for retirement or college funding, subject to employer’s consent

•Cash values may be creditor protected (varies by state)

•Employer has “veto” power over executive’s access to policy cash values

Employer restricts executive’s ability to exercise ownership rights

Executive owns policy

Buy-Sell PlanningBuy-Sell Planning

Triggering EventsTriggering Events

DeathDisabilityRetirement

Every Business Every Business Has Three ValuesHas Three Values

1. Going concern value2. Liquidation value3. Gone value

AdvantagesAdvantages

Guarantees a buyerEstablishes estate tax value at death

Provides for fundingAllows a smooth transition

You Want:You Want:

Top dollar for your businessPrompt settlementFixed estate tax value at deathRelief to family from business worries

The Remaining The Remaining Owners WantOwners Want

Full control of businessMinimum payment for businessNo interference from deceased’s family members

Smooth & prompt transferContinuing line of business credit

Don’t ignore the issues…Don’t ignore the issues…

or you’re sure to have a problem!

Adopt A Buy-Sell Adopt A Buy-Sell Agreement And Fund ItAgreement And Fund It

Funding MethodsFunding Methods

Personal funds of buyerSinking fundBorrowed fundsInstallment paymentsLife insurance

Advantages of Advantages of Using Life InsuranceUsing Life Insurance

CertaintyIncome-tax-free proceeds at deathCash value availableCost efficient dollarsStrengthens credit

Two Types of Buy-SellsTwo Types of Buy-Sells

1. Cross purchase

2. Stock redemption

50 shares $250,000

Life Insurance Company

B’s estateA

50 shares

$250,000

Premiums Premiums

Death proceeds$250,000

Cross-Purchase PlanCross-Purchase Plan

100 shares$200,000

Stock RedemptionStock Redemption

ABC Corp.300 shares outstanding

Valuation:$600,000

Life Insurance Company

premiums

death proceeds

A’s stock is retired by

corporation

$200,000death proceeds

100 shares$200,000

Business ValuationBusiness Valuation

Fair Market Value

Plan now for the successful Plan now for the successful future of your businessfuture of your business

Disability Income Disability Income InsuranceInsurance

Your Most Valuable AssetYour Most Valuable Asset

Your ability to earn an income

Disability Coverage TypesDisability Coverage Types

IndividualGroupBusiness overhead expenseDisability buyout

Typical FeaturesTypical Features

Definition of disabilityPartial or residual disabilityCost of living adjustmentNon-cancelableGuaranteed renewableWaiting or elimination periodBenefit periods

Taxation of Personally-Owned Taxation of Personally-Owned Disability Income Insurance Disability Income Insurance PoliciesPolicies

Premiums are not deductibleBenefits are income tax-free

Employer-Paid PoliciesEmployer-Paid Policies

Employer deducts premiumPremiums are not taxable to employee

Benefits are included in employee’s income

Disability Buy-OutDisability Buy-Out

Premiums not deductibleProceeds not treated as taxable income

Qualified PlansQualified Plans

FeaturesFeatures

Tax-deductible employer contributions

Maximum contribution amountsVesting schedulesDistributionsReporting & disclosure

Defined Benefit Defined Benefit Pension PlansPension Plans

Retirement benefit is based on salary & length of service.

Defined Contribution PlansDefined Contribution Plans

Money purchaseProfit sharing401(k)

Other Qualified PlansOther Qualified Plans

412(i) Pension PlanTraditional IRARoth IRASIMPLE IRASimplified Employee Pension (SEP)Tax-sheltered Annuity (TSA)

Group Term Life InsuranceGroup Term Life Insurance

Corporation deducts premiumsEmployees not taxed on the premiums unless coverage exceeds $50,000

A Personal Estate Plan:A Personal Estate Plan:

Plan of DispositionPlan of Liquidation

The Estate Tax The Estate Tax Roller CoasterRoller Coaster

Phase One (2009)Exemption amounts gradually increase Top tax rate gradually declines to 45%

Phase Two (2010)Estate tax repealed (for one year only)

Phase Three (2011+)Estate tax returns with $1 million

exemption and 55% top rate

Estate Tax Estate Tax Exemption AmountsExemption Amounts

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

2009 2010 2011+

Top Estate Tax RatesTop Estate Tax Rates

2009 2010 2011+

TTaaxxaabbllee EEssttaattee SSttaattee && FFeeddeerraall

EEssttaattee TTaaxxeess

TTaaxx aass %% ooff EEssttaattee**

$15,000,000 $10,000,000 $7,500,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000

$6,201,740 $3,512,180 $2,187,860

$890,380 $379,220 $182,000 $99,600

41% 35% 29% 18% 9% 6% 5%

*Combined federal and state taxes. Assumes a state death tax with a $1 million exemption.

The Estate Tax Bite in The Estate Tax Bite in 20092009

Problems You’ll Encounter Problems You’ll Encounter as a Business Owneras a Business Owner

Estate taxes & expensesBusiness continuityBalancing interest of heirs

Distribution to Heirs Distribution to Heirs Equally or EquitablyEqually or Equitably

Partial SolutionsPartial Solutions

Minimize taxes through estate planning

Sell off part of business to pay taxes

Complete Solutions:Complete Solutions:

Funded buy-sell planIrrevocable life insurance trust

What do you have to What do you have to lose?lose?

Except all your hard work and your business

Review: Planning StrategiesReview: Planning Strategies

Split-Dollar

Executive Bonus

Key Person

Non-qualified Retirement

Qualified Plans

Buy-Sell Agreement

Business Organization

Disability IncomeSERP

Review: Planning ServicesReview: Planning Services

Financial Planning

Estate Planning

College Funding

Investments

Retirement Planning

Pension Administration

business owner insurance planning by mark simon

insurance policy

key employees

business planning

taxfree death benefits

retirement employer

control of benefit

employees life insurance

key person insurance

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