Allianz Life Insurance Company of North America

For financial professional use only – not for public distribution.

An introduction to small-business ownersBuy-Sell Agreements

BUSINESS CONTINUATION STRATEGIES using life insurance

PPT-262 1/2014

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1. Why business continuation planning?2. Buy-sell agreements3. Cross-purchase agreements4. Entity purchase agreements

Agenda

This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. We encourage you to consult your tax advisor or attorney.

Before we begin

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Why business continuation planning?

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Why business succession planning?

Try answering the following questions:

What will happen to your business when you retire?

Do you have a business successor lined up and ready to take over?

Will your entire business or a share of your business need to be sold?

Do you already have buyer and what is the price?

What if you died today?

What would be the consequences to your business partners, employees, customers, debtors, creditors, and most importantly, your family and beneficiaries?

The LOSS OF AVITAL EMPLOYEE

can have a much more

CATASTROPHIC IMPACT on the

survival of a small company than a

large one.1

1”Small World, Trends in the U.S. Small Business Market,” LIMRA, 2013.This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

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Potential pitfalls survivors may face after the death of a business owner

Conflict between surviving owners & family

Concerns of employees & creditors

Lack of market

Valuation difficulties

Lack of income for family

Surviving owners may be forced to buy via installment sale unless funded with insurance

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How can life insurance fit into business succession planning?

A death benefit provided by life insurance can be a vital part of your business succession planning and employee retention.

Fixed indexed universal life (FIUL) insurance can also help while providing potential tax advantages.

Key person life insurance

Buy sell agreements

Executive bonus plans

Nonqualified deferred

compensation

Some common uses of life insurance in business succession planning

The death benefit is the main reason for purchasing life insurance

It passes income-tax-free to the beneficiaries and can be used for: Income replacement for primary

wage earners Business succession Mortgage and other debts Estate tax coverage

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Source: 1“Small World: Trends in the U.S. Small Business Market, LIMRA, 2013.

Small businesses REQUIRE MULTIPLE

TYPES OF FINANCIAL PROTECTION

including: Personal coverage for

the business ownerFinancial safeguards for

the business Insurance and

retirement benefits for the employees1

For financial professional use only – not for use with the public.

HOW FIUL WORKS

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Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and your clients should consult a tax professional.

POLICYHOLDER

Pays POLICYPREMIUMS

POLICY FEES & CHARGES Fees & charges used to fund

DEATH BENEFIT TO BENEFICIARIESAND OTHER VARIOUS EXPENSES

MAXIMUM PREMIUM

Minimum premium

Any available

CASH VALUE

Has the potential to

GROW

as more premium is p

aid

Cash value may be accessed via POLICY LOANS

AND WITHDRAWALS1

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Buy-sell agreements

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Buy-sell agreements funded with life insurance

A BUY-SELL Agreement

is the legal contract obligating the sale and purchase of

the business.

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Legal contract to sell the business upon a specific event

Indicates to whom the business will be sold

The percentage of ownership to be sold

The sale price

Provides details on the sale

Buy-sell agreements funded with life insurance

WHY have one? Control disposition of business Guarantee a buyer Predetermine the price Set value for federal estate tax Assure creditors of continuation Provide money to fund at exact time

needed Fairly treat non-business family members

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BUY-SELL AGREEMENTS CAN PLAY A VITAL PART in a business continuation strategy.

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Cross-purchase agreement

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Cross-purchase buy-sell agreements

The agreement is between THE BUSINESS OWNERS.Hypothetical example:1 ABC CORP. Three equal owners (Andy, Bobbie, and Carla) If one owner dies, the two surviving owners will purchase the

deceased’s business from his estate with the death benefit Andy owns life insurance policies on Bobbie and Carla Bobbie owns life insurance policies on Andy and Carla Carla owns life insurance policies on Andy and Bobbie

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1Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

Cross-purchase agreement hypothetical example

If CARLA dies: Andy and Bobbie use the

death benefit from their life insurance policies on Carla’s life to buy out her interest in the corporation.

Andy and Bobbie now each own 50% of ABC Corp.

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Hypothetical example is for illustrative purposes only.These characters are fictional and not actual Allianz clients.Andy’s

$50,000insuranceproceeds

Carla’s ESTATE

Bobbie’s$50,000

insuranceproceeds

Cross-purchase agreements

Some ADVANTAGES:

Owners own and control the policies

Surviving owner(s) purchase the business using the death benefit proceeds and has a cost basis equal to the purchase price

Avoids corporate Alternative Minimum Tax (AMT) for C corporations

Flexibility in how much of the business each owner purchases

Some ADDITIONAL CONSIDERATIONS: Can become more complex when

there are more than two owners N(N-1) policies are required

- N = number of owners- Example: 3 owners need 3(3-1)

or 6 policies Owners purchase the life insurance

policies so they need the money to do so

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Cross-purchase agreements

Potential tax consequences of a cross-purchase agreement

To BUSINESS:

No income tax ramifications Agreement is among the owners Life insurance purchased personally

To BUSINESS OWNERS:

Insurance premiums are not income-tax-deductible

Death benefit is generally income-tax-free

Transfer for value problems could tax the death benefit

Deceased business owner has purchase value generally included in their taxable estate

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Cross-purchase agreements

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Entity purchase agreements

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Entity purchase agreement hypothetical example

The agreement is between the BUSINESS AND THE OWNER(S).Hypothetical example:1 ABC CORP. Three owners: Andy, Bobbie, and Carla ABC, Inc. purchases three life insurance policies on Andy,

Bobbie, and Carla The business and owners set up an agreement by working with

their attorney, that if one owner dies, the business will purchase the deceased’s business from his/her estate

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1Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

Entity purchase agreement hypothetical example

If CARLA dies: The death benefit on Carla

would be paid to ABC Corp. ABC Inc. would use the death

benefit to pay to Carla’s estate to buy her business interest

ABC would receive Carla’s share of the business

Andy and Bobbie now each own 50% of ABC Corp., Inc.

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Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

Andy

Bobbie Carla’s ESTATE

kkkkkkk

$100,000

death benefitkkkk

Sells her portion

of shares

Entity purchase agreements

Some ADVANTAGES:

Simple to understand and arrange Fewer policies required Business pays premium Business owned policy could be

used for other purposes such as:- Key employee- Nonqualified deferred comp

Some ADDITIONAL CONSIDERATIONS: Employer owned life insurance

(EOLI) rules require signed notice and consent from the insured before a policy is issued.¹

Cost of life insurance needs to be considered in this strategy

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¹An employer owned life insurance policy may be subject to the requirements of Internal Revenue Code 101(j) in order to obtain an income tax free death benefit. In general those rules require that before the policy is issued, the employer must provide the insured with a written notice of the life insurance and obtain a written consent from the insured. Consult with an attorney for application of those rules to a specific situation.

Potential tax consequences

To the business:

Business cannot deduct the premium from income taxes

EOLI rules apply to obtain a tax-free death benefit¹

C corporations: Corporate AMT may apply to subject cash value growth and/or death benefit to income taxation

To the business owners:

No taxable impact to them – business owns the policies

Deceased shareholder includes the purchase price of the business in their taxable estate

Surviving owners are not involved in the purchase – no cost basis change/increase for them

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¹An employer owned life insurance policy may be subject to the requirements of Internal Revenue Code 101(j) in order to obtain an income-tax-free death benefit. In general those rules require that before the policy is issued, the employer must provide the insured with a written notice of the life insurance and obtain a written consent from the insured. Consult with an attorney for application of those rules to a specific situation.

Work with your team of professionals to see if fixed index universal life insurance can help with your business-planning strategies.

The next step

Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America.

The Employee Retirement Income Security Act (ERISA) may apply. Be sure to consult your tax advisor or attorney regarding your own situation.

Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.950.1962 www.allianzlife.comProduct and feature availability may vary by state.

DisclosuresAllianz Life Insurance Company of North America (Allianz)

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24OUR MISSION:Allianz Life Insurance Company of North America is the trusted authority in insured retirement solutions for consumers working with a financial professional.