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Business Owner Insurance Planning By Mark Simon


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Business Owner Insurance Planning By Mark Simon

  1. 1. Planning For Business Owners Presented by: Mark L. Simon Financial Services Professional California Insurance License No. 0E41454
  2. 2. Benefits For: <ul><li>You and your key persons only </li></ul><ul><li>All of your employees </li></ul>
  3. 3. Benefits For You & Your Key People: <ul><li>Supplemental executive retirement plan (SERP) </li></ul><ul><li>Executive bonus plan </li></ul><ul><li>Split-dollar insurance </li></ul><ul><li>Buy-sell funding </li></ul><ul><li>Key person protection </li></ul><ul><li>Disability income insurance </li></ul><ul><li>Estate planning </li></ul>
  4. 4. Benefits For All Employees: <ul><li>Qualified pension plans </li></ul><ul><li>Group life and health insurance </li></ul>
  5. 5. Ideal Fringe Benefit From a Tax Standpoint <ul><li>Current tax deductions for the business </li></ul><ul><li>Deferred tax to recipient </li></ul>
  6. 6. Cost to Corporation Corporate Tax Bracket (%) Tax-deductible Corp. Dollar After-tax Cost 34% $1.00 $.66 15% $1.00 $.85
  7. 7. Tax-Deductibility is only one factor to be considered
  8. 8. Ideal Fringe Benefit From a Planning Standpoint Relieves an employee of a personal non-deductible expense
  9. 9. Income Tax Rates <ul><li>Affect business planning </li></ul>
  10. 10. Personal Tax Bracket vs. Corporate Tax Bracket
  11. 11. Benefit Planning Key Questions: <ul><li>1. Is it deductible? </li></ul><ul><li>2. Who controls benefit values? </li></ul>
  12. 12. What is Most Important to You? <ul><li>Tax-deductibility </li></ul><ul><li>or </li></ul><ul><li>Control of benefit </li></ul>
  13. 13. Types of Business <ul><li>Sole proprietorship </li></ul><ul><li>Partnership </li></ul><ul><li>C corporation </li></ul><ul><li>S corporation </li></ul><ul><li>Professional corporation </li></ul><ul><li>Limited liability company (LLC) </li></ul>
  14. 14. Sole Proprietorship <ul><li>A business owned entirely by one person </li></ul>
  15. 15. Partnership <ul><li>An association of two or more persons as co-owners of a business for profit </li></ul>
  16. 16. Corporation <ul><li>A separate legal entity apart from its owners </li></ul>
  17. 17. S Corporations Enjoy: <ul><li>Limited liability </li></ul><ul><li>Employee benefit advantages (for non-shareholders) </li></ul>
  18. 18. S Corporation <ul><li>Taxed like a partnership </li></ul>
  19. 19. Professional Corporations <ul><li>Organizations of physicians, lawyers and other professional people </li></ul><ul><li>Treated as a corporation for tax purposes </li></ul><ul><li>Not taxed the same as C corporations </li></ul><ul><li>Can elect S corporation status </li></ul>
  20. 20. Limited Liability Companies <ul><li>An LLC member’s potential liability is limited </li></ul><ul><li>LLCs are not burdened by ownership restrictions applicable to S corporations </li></ul><ul><li>LLCs may have more than one class of stock </li></ul><ul><li>Preferred allocations of profits and losses are allowed </li></ul>*LLC law is relatively new and uncertain. Consultation with an LLC expert in your state is recommended.
  21. 21. Choosing the Form of Business Organization <ul><li>Taxation </li></ul><ul><li>Limited liability </li></ul><ul><li>Employee benefits </li></ul>
  22. 22. Key Person Insurance
  23. 23. Who is a Key Person? <ul><li>High salary level </li></ul><ul><li>Decision-making power </li></ul><ul><li>Ability to implement plans </li></ul><ul><li>Financial leverage </li></ul><ul><li>Special talent </li></ul>
  24. 24. Problems <ul><li>Disruption of management </li></ul><ul><li>Reduction in earnings </li></ul><ul><li>Impairment of credit </li></ul><ul><li>Loss of confidence </li></ul><ul><li>Replacement costs </li></ul>
  25. 25. How Key Person Insurance Works Key Employee Business Premiums Death Benefits <ul><li>Business owns and controls the policy. </li></ul><ul><li>Business is the premium payor and policy beneficiary. </li></ul><ul><li>Business receives tax-free death benefits. </li></ul>
  26. 26. Adopt A Corporate Resolution <ul><li>Why? </li></ul><ul><ul><li>To fully protect your business </li></ul></ul>
  27. 27. Executive Fringe Benefits
  28. 28. <ul><li>Supplemental Executive Retirement Plan </li></ul><ul><li>Split-Dollar </li></ul><ul><li>Custodial Executive Bonus </li></ul><ul><li>Executive Bonus </li></ul>Is Control Important? + EMPLOYER CONTROL -
  29. 29. Supplemental Executive Retirement Plan (SERP) Golden Handcuffs
  30. 30. SERP Defined <ul><li>“ A contract between an employer </li></ul><ul><li>and an employee to provide </li></ul><ul><li>retirement and perhaps death and/ </li></ul><ul><li>or disability benefits to select employees” </li></ul>Life insurance is purchased on the employee’s life to assist employer in meeting future obligations
  31. 31. SERPs Help Complete the Retirement Picture
  32. 32. How it Works Policy Benefits Premiums Agreement Retirement and/or Disability $ Business Executive Death Benefits Beneficiary Step1 Step 2 Step 3 Step 4 Step 5 Ins Co.
  33. 33. Advantages <ul><li>Places “golden handcuffs” on key employees </li></ul><ul><li>Attracts the best of the best and gives key employees an incentive to stay </li></ul><ul><li>Flexible benefits </li></ul><ul><li>Pick and choose participants </li></ul><ul><li>Corporation can recover its costs </li></ul><ul><li>Minimal compliance issues </li></ul>
  34. 34. SERPs and Taxes
  35. 35. Accounting for SERPs <ul><li>Funding vehicle carried as asset on corporate books </li></ul><ul><li>Promise to pay benefits is a corporate liability </li></ul>
  36. 36. Split-Dollar Insurance
  37. 37. Split-Dollar Insurance <ul><li>Ownership </li></ul><ul><li>Benefits </li></ul><ul><li>Premium </li></ul>An insurance policy is “split” between the business and the individual
  38. 38. Split-Dollar Applications <ul><li>Fringe benefit </li></ul><ul><li>Estate liquidity </li></ul><ul><li>Buy-sell planning </li></ul><ul><li>Group term replacement </li></ul>
  39. 39. Split-Dollar <ul><li>… a versatile fringe benefit that permits the acquisition of needed life insurance at a reduced cost </li></ul>
  40. 40. Premium Split Employer Employee
  41. 41. Death Benefit Split Employee’s Beneficiary Employer Split-dollar is also used to share policy cash value between an employer and an employee
  42. 42. Choices! Economic Benefit Plan Loan Plan Policy Owner Employer Employee Employee’s Cost Annual term value of death benefit Annual 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 Balance of death benefit Cost Recovery When plan ends When plan ends
  43. 43. Rollout at Retirement <ul><li>Employer receives its premium payments back </li></ul><ul><li>Employee receives policy (minus employer’s premium) </li></ul>
  44. 44. Tax Consequences <ul><li>Employer: </li></ul><ul><ul><li>No deduction, but owns the cash value </li></ul></ul><ul><li>Employee: </li></ul><ul><ul><li>Taxed on economic benefit and any cash values received </li></ul></ul>
  45. 45. Retirement Planning <ul><li>What have you done? </li></ul><ul><li>Could you do more? </li></ul>
  46. 46. Would you be interested in tax-advantaged retirement cash flow?
  47. 47. Would you be interested in a plan where values grow tax-deferred?
  48. 48. Would you be interested in a plan that allows you to exclude all of your employees?
  49. 49. Would you be interested in a plan with minimal government rules or regulations?
  50. 50. Your Plan Utilizing the advantages of permanent life insurance
  51. 51. Permanent Life Insurance <ul><li>Policy cash values grow tax deferred </li></ul><ul><li>As long as the policy remains in force, withdrawals up to basis and loans are tax free </li></ul>
  52. 52. Take Care of YOUR Retirement Needs!
  53. 53. Executive Bonus Plan <ul><li>Compensates select key employees using life insurance </li></ul><ul><li>Simple to install </li></ul><ul><li>Costs of the plan are tax-deductible </li></ul>
  54. 54. How it Works Business pays premium Business receives current tax deduction Insurance policy is purchased Business Executive Income tax free Death benefit Heirs Ins Co. Premium is taxable bonus Executive owns policy <ul><li>Executive is taxed on bonus </li></ul><ul><li>Cash values build tax-deferred (as long as policy stays in force) </li></ul><ul><li>Policy cash values available for retirement or college funding </li></ul><ul><li>Cash values may be creditor protected (varies by state) </li></ul><ul><li>Death benefits may be used for estate settlement </li></ul>
  55. 55. Executive Bonus Plan  Under current tax law
  56. 56. How Custodial Executive Bonus Works Business pays premium Business receives tax deduction Insurance policy is purchased Business Executive Income tax free death benefit Heirs Ins Co. Premium is taxable bonus <ul><li>Cash values build tax-deferred ( as long as policy stays in force) </li></ul><ul><li>Accumulated cash value for retirement or college funding , subject to employer’s consent </li></ul><ul><li>Cash values may be creditor protected (varies by state) </li></ul><ul><li>Employer has “veto” power over executive’s access to policy cash values </li></ul>Employer restricts executive’s ability to exercise ownership rights Executive owns policy
  57. 57. Buy-Sell Planning
  58. 58. Triggering Events <ul><li>Death </li></ul><ul><li>Disability </li></ul><ul><li>Retirement </li></ul>
  59. 59. Every Business Has Three Values <ul><li>1. Going concern value </li></ul><ul><li>2. Liquidation value </li></ul><ul><li>3. Gone value </li></ul>
  60. 60. Advantages <ul><li>Guarantees a buyer </li></ul><ul><li>Establishes estate tax value at death </li></ul><ul><li>Provides for funding </li></ul><ul><li>Allows a smooth transition </li></ul>
  61. 61. You Want: <ul><li>Top dollar for your business </li></ul><ul><li>Prompt settlement </li></ul><ul><li>Fixed estate tax value at death </li></ul><ul><li>Relief to family from business worries </li></ul>
  62. 62. The Remaining Owners Want <ul><li>Full control of business </li></ul><ul><li>Minimum payment for business </li></ul><ul><li>No interference from deceased’s family members </li></ul><ul><li>Smooth & prompt transfer </li></ul><ul><li>Continuing line of business credit </li></ul>
  63. 63. Don’t ignore the issues… <ul><li>or you’re sure to have a problem! </li></ul>
  64. 64. Adopt A Buy-Sell Agreement And Fund It
  65. 65. Funding Methods <ul><li>Personal funds of buyer </li></ul><ul><li>Sinking fund </li></ul><ul><li>Borrowed funds </li></ul><ul><li>Installment payments </li></ul><ul><li>Life insurance </li></ul>
  66. 66. Advantages of Using Life Insurance <ul><li>Certainty </li></ul><ul><li>Income-tax-free proceeds at death </li></ul><ul><li>Cash value available </li></ul><ul><li>Cost efficient dollars </li></ul><ul><li>Strengthens credit </li></ul>
  67. 67. Two Types of Buy-Sells <ul><li>1. Cross purchase </li></ul><ul><li>2. Stock redemption </li></ul>
  68. 68. Cross-Purchase Plan 50 shares $250,000 A 50 shares $250,000 B Life Insurance Company B’s estate A 50 shares $250,000 Premiums Premiums Death proceeds $250,000
  69. 69. Stock Redemption B A 100 shares $200,000 C ABC Corp. 300 shares outstanding Valuation:$600,000 Life Insurance Company premiums death proceeds A’s stock is retired by corporation $200,000 death proceeds 100 shares $200,000 100 shares $200,000
  70. 70. Business Valuation Fair Market Value
  71. 71. Plan now for the successful future of your business
  72. 72. Disability Income Insurance
  73. 73. Your Most Valuable Asset <ul><li>Your ability to earn an income </li></ul>
  74. 74. Disability Coverage Types <ul><li>Individual </li></ul><ul><li>Group </li></ul><ul><li>Business overhead expense </li></ul><ul><li>Disability buyout </li></ul>
  75. 75. Typical Features <ul><li>Definition of disability </li></ul><ul><li>Partial or residual disability </li></ul><ul><li>Cost of living adjustment </li></ul><ul><li>Non-cancelable </li></ul><ul><li>Guaranteed renewable </li></ul><ul><li>Waiting or elimination period </li></ul><ul><li>Benefit periods </li></ul>
  76. 76. Taxation of Personally-Owned Disability Income Insurance Policies <ul><li>Premiums are not deductible </li></ul><ul><li>Benefits are income tax-free </li></ul>
  77. 77. Employer-Paid Policies <ul><li>Employer deducts premium </li></ul><ul><li>Premiums are not taxable to employee </li></ul><ul><li>Benefits are included in employee’s income </li></ul>
  78. 78. Disability Buy-Out <ul><li>Premiums not deductible </li></ul><ul><li>Proceeds not treated as taxable income </li></ul>
  79. 79. Qualified Plans
  80. 80. Features <ul><li>Tax-deductible employer contributions </li></ul><ul><li>Maximum contribution amounts </li></ul><ul><li>Vesting schedules </li></ul><ul><li>Distributions </li></ul><ul><li>Reporting & disclosure </li></ul>
  81. 81. Defined Benefit Pension Plans Retirement benefit is based on salary & length of service.
  82. 82. Defined Contribution Plans <ul><li>Money purchase </li></ul><ul><li>Profit sharing </li></ul><ul><li>401(k) </li></ul>
  83. 83. Other Qualified Plans <ul><li>412(i) Pension Plan </li></ul><ul><li>Traditional IRA </li></ul><ul><li>Roth IRA </li></ul><ul><li>SIMPLE IRA </li></ul><ul><li>Simplified Employee Pension (SEP) </li></ul><ul><li>Tax-sheltered Annuity (TSA) </li></ul>
  84. 84. Group Term Life Insurance <ul><li>Corporation deducts premiums </li></ul><ul><li>Employees not taxed on the premiums unless coverage exceeds $50,000 </li></ul>
  85. 85. A Personal Estate Plan: <ul><li>Plan of Disposition </li></ul><ul><li>Plan of Liquidation </li></ul>
  86. 86. The Estate Tax Roller Coaster <ul><li>Phase One (2009) </li></ul><ul><ul><li>Exemption amounts gradually increase </li></ul></ul><ul><ul><li>Top tax rate gradually declines to 45% </li></ul></ul><ul><li>Phase Two (2010) </li></ul><ul><ul><li>Estate tax repealed (for one year only) </li></ul></ul><ul><li>Phase Three (2011+) </li></ul><ul><ul><li>Estate tax returns with $1 million exemption and 55% top rate </li></ul></ul>
  87. 87. Estate Tax Exemption Amounts
  88. 88. Top Estate Tax Rates
  89. 89. The Estate Tax Bite in 2009 *Combined federal and state taxes. Assumes a state death tax with a $1 million exemption.
  90. 90. Problems You’ll Encounter as a Business Owner <ul><li>Estate taxes & expenses </li></ul><ul><li>Business continuity </li></ul><ul><li>Balancing interest of heirs </li></ul>
  91. 91. Distribution to Heirs Equally or Equitably
  92. 92. Partial Solutions <ul><li>Minimize taxes through estate planning </li></ul><ul><li>Sell off part of business to pay taxes </li></ul>
  93. 93. Complete Solutions: <ul><li>Funded buy-sell plan </li></ul><ul><li>Irrevocable life insurance trust </li></ul>
  94. 94. What do you have to lose? Except all your hard work and your business
  95. 95. Review: Planning Strategies
  96. 96. Review: Planning Services