Business Owners and Executives
As business owner ourselves, Hanzlik Financial understands the important of proper planning. When your primary focus is your business, it’s easy to overlook how to efficiently and effectively operate your business. Are you taking the proper steps to insure your personal financial success?
Some questions you should ask yourself or your business partner(s) are:
- How to compensate and reward your key employees?
- What if an employee, partner or investor left my business – how could you protect against that loss?
- In the event the owner was disabled, how would the business continue operations?
- What is the true market value of your business?
- Who is the potential buyer of your business?
If you are unsure on how best to answer any of these questions, it may be best to find a time to connect with Hanzlik Financial. Our free, no cost or obligation consultation is an easy way to discover potential solutions and if a relationship would be beneficial.
- Business planning: The key to protecting your business and your net worth
- Key Person Life Insurance: Protect your business against the loss of key people
- Business estate planning: How to preserve your life’s work
- Business continuation: Planning for your business after you’re gone
Benefits for key executives
- Executive Bonus Plans: How to reward key employees
- The Golden Executive Bonus Agreement: Protecting key employees with life insurance
- Life Rewards: Providing retirement benefits for key employees
- Planning for changes in ownership
Planning for changes in ownership
You can prepare for the problems that can come with a change in ownership by using these techniques:
Buy-Sell agreements: This is the most common business continuation tool. Life insurance funds the agreement, which establishes the value of your business and assures a ready market for your share in the business after you’re gone.
Key Employee Life Insurance: Provides you with the funds you need to keep your business running smoothly when you lose a key employee.
Personal estate planning: Carefully incorporating your business needs into a total estate plan can help you meet estate tax and liquidity needs to preserve the full value of your business for your family and associates. 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, and may contain restrictions, such as surrender periods.
Fee Based Business Planning
Develop a strategy to preserve your business and your net worth.
Effective business continuation 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.
However, business continuation and benefit planning is also a science. The best business plan should take into account the tax and legal ramifications of the various financial strategies adopted. A Financial Advisor or Registered Representative will incorporate both the art and science of business planning in a program recommended to you.
Separate from the 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 business plan and you are under no obligation to follow them.
Using business dollars for personal expenses
These valuable concepts can help:
Split-dollar life insurance: Your corporation can help you pay for your own life insurance by “advancing” your money to pay the annual premium. This benefit can also be available for key employees
Disability insurance: Your business can provide you with personal disability insurance — which continues a portion of your salary when you’re unable to work — and the premiums (in most cases) are tax deductible.
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 increase income and improve retention of key employees
These concepts can help you get the most out of your benefit dollars:
Disability salary continuation benefit: A salary continuation benefit can help protect you, your key employees and your business from the financial consequences of a disability. If the benefit is funded with disability insurance policies, premium payments are considered tax deductible as a necessary business expense.
Qualified pension and profit-sharing plans: Employee-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.
Life Rewards: Highly compensated executives are limited in the amounts they can save for retirement in qualified plans. Non-qualified plans are available through Life Rewards and allow associates to enhance their retirement benefits.
Split-Dollar insurance: Life insurance can be provided to select executives at a reduced cost through split dollar insurance plans.
Golden Executive Bonus Arrangement(GEBA): GEBA and other executive bonus strategies provide life insurance to employees and give your company a current income tax deduction.
Personal financial analysis: This service helps employees manage their money more effectively and achieve their personal financial goals.
Group insurance:Your business can provide a variety of programs, and the tax deductions generated by the premiums you pay make the cost of these benefits even lower. Medical, disability and life insurance are the three most sought-after programs.
The Art and Science of Business Planning can help ensure the ongoing success of your business.
Key Person Insurance
Protect your business against the loss of one of your most vital assets: key employees
Key people are vital to the success of your business. A Key Person Life Insurance Policy or Program Arrangement can provide the funds you need to keep your business running smoothly after you’ve lost a key employee through death or employee turnover.
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 a key employee dies, the employer receives the policy’s income tax-free death benefit* and can apply it towards business expenses or losses caused by the employee’s death.
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.
Select no-qualified retirement benefits for your key executives.
The benefit program your company offers is critical to attracting and retaining top employees. Qualified benefit programs — pension and 401(k) plans — limit participation by highly compensated executives. A non-qualified plan is a unique benefit designed to attract and reward top executives. Life Rewards, a customized non-qualified benefit program, can strengthen the tie between your company and its top executives.
You can provide Life Rewards for your key executives to:
- Secure the services of your most influential executives that may impact profitability
- Attract new managers
- Build loyalty in today’s high turnover marketplace
- Provide a second tier of benefits to highly compensated executives disadvantaged by qualified
Three Life Rewards strategies are available:
Executive Deferral : Allows the executive to defer a portion of base salary, bonus or commissions, which lowers currently taxable income.
Deferred Bonus : Restricted solely to discretionary employer contributions and rewards the executive subject to a vesting schedule you select.
Executive Salary Continuation : Protects against inflation to help your valued executives achieve a comfortable retirement. Funded entirely with company dollars.
Life Rewards offer valuable benefits to key executives:
- Lower currently taxable income during their working years
- A survivor benefit for their family
- Tax deferred growth of retirement assets
- Parity for executives limited by qualified plan restrictions
Who can sponsor a non-qualified Life Rewards strategy or benefit?
Any company can establish a non-qualified Life Rewards strategy or benefit. C corporations best complement the tax advantages of a non-qualified strategy or benefit; however, non-shareholders of an S corporation also benefit. Other entities such as a limited liability company, limited liability partnership, sole proprietorship or partnership may also sponsor a non-qualified plan for select non-owner executives.
Life insurance is a commonly used informal funding vehicle for nonqualified benefits because of the death benefit it provides and its tax-advantaged status. Your company will be the owner and beneficiary of the life insurance policy, which insures the executive participant in the plan.
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, and may contain restrictions, such as surrender periods.
Golden Executive Bonus Arrangement (GEBA):
A compensation tool 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. Until recently, government regulations made it almost impossible to single out and reward those employees you value most.
The Golden Executive Bonus Arrangement (GEBA) can be a solution for rewarding and retaining your most valued executives. This tool 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
- It is income tax-deductible for your company
- You can adjust the benefit to meet your future needs
- It is easy to get started
If you’re looking for an executive compensation tool that helps you retain one or more key executives, consider using life insurance in a GEBA.
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. Business-oriented financial strategies can help reduce estate taxes and make efficient use of the cash available. The most common business estate-planning tools are buy-sell agreements, Section 303 stock redemption, 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.
The life insurance death benefit is income tax free to the business if the business, at the time of purchase, had met the requirements of Internal Revenue Code Section 101 (j) including providing the insured with advance notice, obtaining the insured’s prior consent to be insured, and meeting insured’s executive income requirements.
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 stock from his or her estate.
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 will benefit:
- Prevents conflict with surviving owners
- 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 Redemption
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
There is an exclusion for estate taxes specifically for family owned business and their transition to other family members. 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.
Business continuation strategy:
Prepare for the continued success of your business after you’re gone.
Business continuation strategy can help you avoid the problems that can occur when a business owner dies. A life insurance funded business continuation strategyprovides 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 strategies are available:
Cross Purchase Strategy
An agreement between co-owners of a business. Surviving owners purchase pro rata shares of the deceased owner’s stock from the estate. To fund the purchase, each stockholder owns, pays premium on and is the beneficiary of an appropriate amount of life insurance on the other owners.
Stock Redemption/Entity Purchase Strategy
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.
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 Plan
A special type of stock redemption plan 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.