Transfer or sell. your business. on your terms. business succession planning. Life. your way

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1 Transfer or sell your business on your terms business succession planning Life. your way SM

2 Life. your way Strive to live your dream and plan for the if in life. Discover the flexibility of life insurance protect, accumulate and transfer wealth now and in the future. Be free to live life, your way.

3 WHaT f fw to sell my business when I retire? my partner s plan Is to take over the business, how do I ensure a fair price for my beneficiaries? fs fome of my children are Interested In the business, but fo others are not. how do I divide my legacy fairly? ifi fwant As a successful business owner, you have worked hard and continue to work hard to build and grow your business. Your business is the source of financial well being for you, your family, business partners and employees. You may be looking forward to a long and successful future. But, what if something happens? Have you planned for the day when you will no longer be actively involved with the business? THe FiRsT step of business succession planning is To DeTeRMine WHaT each owner WoulD like To Happen To THe business in THe event one of THe owners becomes DisableD, ReTiRes or Dies. In an ideal situation, all partners and their beneficiaries, would be in agreement concerning future plans for the business. If an agreement cannot be reached and implemented, the business may need to be sold below market value to pay estate taxes or satisfy beneficiary interests. Even in cases where the business may be saved, the uncertainty surrounding the business future may result in lost customers and sales. Implementing a plan for the succession of your business is the best method to ensure a fair and orderly transition. 1

4 THe second step of a business succession plan is ensuring THaT THeRe is FunDing in place To carry out THe owners WisHes. THeRe are a number of possible sources of cash FoR THe sale and purchase of a business interest Sinking Fund Saving money on a systematic basis may provide a source of funds to facilitate a transferr of the business s interests. However, savingss and investments may be insufficient for an unexpected death or disability wheree completee funding cannot be assured. Borrow the Funds Obtaining a loan to fund the buyout may be an option, but borrowing may be impractical since much of the lender s security typically depends on the stability of the company. In the case of closely held businesses, the shareholder s disability or death may affect that stability. Installment Sale If there is insufficient cash on hand, or if credit is difficult or expensive to obtain, paying for the business interest t over time is often the only practical alternative. Installment t sales, however, can place a burden on both parties to the transfer. The payments can drain current earnings and could place a financial strain on the ability of the business to fund both the buy-out and ongoing g business needs. This approach also forces the departing owner or beneficiaries to rely upon the future success of the business, over which they no longer have day-to-day y control. 4 Insurance Life insurance is often used to fund business succession plans because of its flexibility. The premiums are typically moderate compared to the total amount of money that would have to be raised if a death did occur. In addition, permanent life insurance has a cash value component that may be accessed through withdrawals and loans in the event an owner becomes disabled or retires. The benefits of a life insurance policy include: Income tax-free death benefit which may be used to: - provide cash to purchase a deceased owner s shares - help pay any estate taxes due - provide a legacy to beneficiaries not interested in ownership shares Tax-deferred growth of policy cash values Access to policy cash values through tax-free withdrawals and policy loans A note about life insurance distributions Tax-free distributions assume that the life insurance policy is properly structured, is not a Modified Endowment Contract (MEC) and distributions are made up to the cost basis and policy loans thereafter. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences. Loans and withdrawals will decrease the cash value and death benefit.

5 The Concern The average business owner spends years devoting time, energy and earnings back into his or her business. For many, the goal is for the business to begin paying them back at some point by providing extra retirement income, a successful career for beneficiaries or a legacy to family members. The Solution The best way for you to provide for the future of your business and all who depend on it is to plan today. A business succession plan can be a roadmap for the transfer of your business to successor owners, helping to assure its ongoing success as well as the financial security of you and your family. A critical part of this plan is a buy-sell agreement. How do you protect the value of the business, provide a market for the sale of the business or ensure it will be transferred to your chosen successor? How will your family benefit financially from the business? Who will l own the business? Family members? Business partners? Employees? Competitors? Do you have business partners? What will happen to their interest if something happens to them? Will it pass to their families or the remaining partners? The reality is that at some point you will leave the business. The goal is to have an orderly transition that will not jeopardize a lifetime of hard work or the financial security of family members, employees and/or business partners. A buy-sell agreement is a written, contractual agreement between and among the business owners as to how the business interests will be transferred in case certain events occur. Typically, triggering events would include the death, permanent disability, bankruptcy or termination of employment of an owner. An attempted transfer by an owner of his or her business interest to an outside party or a divorce may also be considered triggering events. if A Buy-Sell Agreement is Importanti t There is potential for inexperienced beneficiaries,i outsiders, to become partners. i,ior You do not have readily available means to purchase the business interest t from your partner s beneficiaries. Beneficiaries may demand more than current market value for their interest in the business. Long-term financing is important. Creditors may view the business as more stable with a continuation plan in place. The company s cash flow is not sufficient enough to support a disabled owner. The business may be subject to estate taxes. A buy-sell may help to set the business value. You want to be assured of a future market for your business by identifying a buyer in advance who may include children, key employees or even competitors. : 3

6 buy-sell How does a w agreement work? THeRe are several DiFFeRenT Types of buy-sell agreements. THe MosT common are: 4 Entity Purchase or Stock Redemption Agreement In this type of arrangement the business itself is obligated to buy the disabled or deceased owner s business interest. The owners enter into the agreement with the business entity. Cross Purchase Agreement Here, the owners agree among themselves to buy each other s interest upon the occurrence of a triggering event. Wait and See Purchase Agreement This is a hybrid agreement that allows the owners to delay the decision as to whether the business interest will be purchased by the business or remaining owners until after the occurrence of a triggering event. In most cases the business is given the right of first refusal. Unilateral (One Way) Purchase Agreement This type of agreement allows a key person, family member or even a competitor to buy the business from the owner. This type of agreement is most common in one-owner businesses.

7 The entity PurchAse or stock redemption AgreemenT In a stock redemption agreement, the owners enter into a binding agreement with the business to sell their shares to the business upon the occurrence of a specified event such as disability, retirement or death. The agreement obligates the shareholders and their estates to sell the shares at an agreed upon or predetermined price to the corporation. The corporation then purchases life insurance on each owner s life in an amount equal to each owner s interest, naming the corporation the owner and beneficiary of the policies. Premium payments are not a deductible business expense. The entity or stock redemption Agreement step 1: step 2: step 3: step 4: The owners enter into an agreement with the business to purchase their ownership shares upon the occurrence of a specified event such as disability, retirement or death. To fund the agreement, the business purchases a life insurance policy on each owner. Once the specified event occurs, the life insurance may be used by the business to purchase the owner s shares. The purchased shares are redistributed proportionately to all remaining owners. 1 Cash value accumulation may not be guaranteed. If variable life insurance is used, the policy cash value is subject to market risk, including loss of principal. Advantages: Simple. The plan is easy to execute and requires only one life policy for each shareholder. Corporation pays premiums. There is no direct financial burden on the shareholders. Corporate asset. Life insurance cash values are listed as assets on the corporate balance sheet t. 1 Access to cash value. The corporation may access policy cash values to purchase shares of disabled or retired business owners. Disadvantages: Basis increase. The surviving shareholders of a C corporation fail to receive a step-up in basis for their proportionate ownership increase. The surviving owners of an S corporation, LLC or Partnership will l receive a partial step-up in basis upon the death of an owner to the extent t the redemption agreement is funded d with life insurance. Corporate Alternative e Minimumm Tax (AMT). Although h the death benefit is not subject to regular r corporate income taxes, the corporate alternative minimum tax could apply. Creditors. Corporate creditors can make claims against cash values of corporate owned life insurance. Accumulated earnings tax. Substantial cash values might be deemed as evidence of accumulation of earnings beyond the corporation s reasonable needs. Family attribution rules. The redemption of stock by the business entity may not be an income tax-free event in a family-owned business. 5

8 The Cross Purchase Agreement In a cross purchase agreement, the owners enter into a binding agreement with each other for the purchase and sale of their respective interests in the business upon the occurrence of a specified event. The agreement obligates the remaining shareholders to buy the departing owner s shares at an agreed upon or predetermined price. Each owner then purchases life insurance on the other owner s lives naming themselves as the policy owner and beneficiary. Insurance proceeds pass income tax free to the surviving owner and are then utilized to buy out the deceased owner s business interest. Advantages: Basis increase. The surviving owners receive a step-up in basis equal to the purchase price of deceased owner s stock. Creditors. The life insurance values are generally protected against company creditors. Possible corporate deduction. If the business has a bonus arrangement with the owners that is within reasonable compensation limits, the bonus would be a deductible business expense and could be used by the recipient to make premium payments. No AMT. Because the corporation does not own the policy, there are no potential AMT and accumulated earnings problems. 6 The Cross Purchase Agreement STEP 1: STEP 2: STEP 3: The owners enter into an agreement with each other to purchase their respective shares in the business upon the occurrence of a specified event. To fund the agreement, each owner purchases a life insurance policy insuring each of the other owners. Once the specified event occurs, the life insurance may be used as a source of funds for each remaining owner to buy out the departing owner s shares. Disadvantages: Complexity. The number of policies grows exponentially with the number of owners. If there are more than two or three owners it may become difficult to manage. For example, four owners would require 12 policies in order to correctly own the needed coverage. [#Owners*(#Owners 1)] Transfer for value. There may be a transfer for value problem if the policies owned by the deceased owner are transferred to the surviving insureds. The transfer for value rule provides that, if a life insurance policy is transferred in exchange for something of value, then the proceeds of the policy shall be considered ordinary income to the extent they exceed the value of the consideration. Some transfers are exempt from this rule. No increase in corporate value. Because the policies are individually owned, they will not be reflected on the corporate balance sheet as an asset.

9 The WAiT AnD see PurchAse AgreemenT A wait and see purchase agreement is a hybrid arrangement whichh generally gives the corporation the option, or right of first refusal, to purchase any portion of the deceased owner s shares within a certain time period after the specified event. If the corporation does not purchase all of the departing owner s shares, the next option is given to the remaining shareholders. Any remaining shares are required to be redeemed by the entity. This type of agreement may be difficult to fund. Typically, the arrangement is funded d as a traditional cross purchase agreement. If it later seems likely thatt the corporation will l purchase the shares, the policies may be sold to the corporation. Advantages: Flexibility. The shareholders have the option to decide who will be the ultimate purchaser of the deceased owner s interest. This will allow them to utilize a corporate owned policy or retained earnings as part of the funding. Basis increase. The surviving owners receive a step up in basis equal to the consideration they paid for the deceased owner s interest. No transfer r for value issues. Interest in policies owned by the deceased owner can be transferred to the corporation under the shareholder/officer exception. Equal ownership. The wait and see may be structured to create ownership equality or ownership in any desired proportion. The Wait and see Purchase Buy sell Agreement step 1: step 2: step 3: The owners enter into an agreement with the business to purchase their ownership shares upon the occurrence of a specified event. The business has the right of first refusal to purchase the departing owner s shares. Typically, each owner purchases a life insurance policy insuring each of the other owners to fund the agreement. If needed, the policies may later be sold to the business. Once the specified event occurs, the business has first option to purchase the shares of the departing owner. Any shares not purchased by the business may be offered to the remaining owners. Any remaining shares are required to be purchased by the business. Disadvantages: Complexity. The number of policies grows exponentially with the number of owners. If there e are more than two or threee owners it may become e difficult to manage. For example, four owners would require 12 policies in order to correctly own the needed coverage. [#Owners*(#Owners 1)] Related owners. Family attribution rules are a potential problem in the event the survivors collect insurance proceeds and then purchase the shares from the deceased owner s estate on an individual basis. Difficulty. The flexibility inherent in this agreement makes it difficult to communicate and fund. 7

10 Unilateral (One Way) Purchase Agreement In a unilateral purchase agreement, one or more key employees enter into a binding agreement with the owner for the purchase and sale of the owner s interests in the business upon the occurrence of a specified event. The agreement obligates the key employees to buy the departing owner s shares at an agreed upon or predetermined price to the corporation. The employee(s) then purchases life insurance on the owner s life naming themselves as the policy owner and beneficiary. Insurance proceeds pass income tax free to the individual employee(s) and are then utilized to buy out the deceased owner s business interest. Unilateral (One Way) Purchase Agreement One or more key employees enter into a STEP 1: binding agreement with the owner to purchase his or her interests upon the occurrence of a specified event. STEP 2: 8 o fund the agreement, the key employee T purchases a life insurance policy on the life of each owner. Once the specified event occurs, the life STEP 3: insurance may be used as a source of funds for the key employee to buy out the departing owner s shares. Advantages: Creditors. The life insurance values are generally protected against company creditors. P ossible corporate deduction. If the business has a bonus arrangement with the key employee(s) that is within reasonable compensation limits, the bonus would be a deductible business expense and could be used by the recipient to make premium payments. N o AMT. Because the corporation does not own the policy, there are no potential AMT and accumulated earnings problems. Disadvantages: T ransfer for value. There may be a transfer for value problem if the policies owned by the deceased owner are transferred to the surviving insureds. The transfer for value rule provides that, if a life insurance policy is transferred in exchange for something of value, then the proceeds of the policy shall be considered ordinary income to the extent they exceed the value of the consideration. Some transfers are exempt from this rule. N o increase in corporate value. Because the policies are individually owned, they will not be reflected on the corporate balance sheet as an asset.

11 The Be Benefits ESTABliShing A BUy-SEll AgREEmEnT has many BEnEfiTS. They include: Guaranteed buyer. Creates a market for an otherwise illiquid business interest. Liquidity created. Provides the means for buyers to purchase the business. Agreed upon selling price. Avoids negotiating for value under adverse circumstances. Tax benefits. May establish the value of the business for IRS purposes. Promotes business stability. Avoids disruption of the business at a critical time. 9

12 Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances. A prospectus for variable life insurance issued and/or distributed by MetLife Investors Distribution Company and for the investment portfolios are available from your financial professional or in the life insurance sales kit. The contract prospectus contains information about the contract s features, risks, charges and expenses. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Please read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. MetLife Investors variable life products have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet their stated goals or objectives. The account value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. All product guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Please contact your financial professional for complete details. Life insurance is medically underwritten. You should not cancel your current coverage until your new coverage is in force. Surrender charges may be due on an exchange of one contract for another. A change in policy may require an examination. Surrenders may be taxable. You should consult your own tax advisors regarding tax liability on surrenders. Guarantee Advantage Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E and in New York, only by Metropolitan Life Insurance Company on Policy Form Series 1E NY. Legacy Advantage Survivorship Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E and in New York, only by Metropolitan Life Insurance Company on Policy Form Series 1E NY. Equity Advantage Variable Universal Life is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E and in New York only by Metropolitan Life Insurance Company, Policy Form Series 1E ny-1. Whole Life is issued by Metropolitan Life Insurance Company on Policy Form Series 8-90(08). Guaranteed Level Term is issued by MetLife Investors USA Insurance Company on Policy Form Series 5E and in New York, only by First MetLife Investors Insurance Company on Policy Form Series 5E ny. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. All products are distributed by MetLife Investors Distribution Company (MetLife Investors), 5 Park Plaza, Suite 1900, Irvine, CA February 2009 Insurance Products: Not A Deposit Not FDIC-Insured Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value Metropolitan Life Insurance Company MetLife Investors Distribution Company 200 Park Avenue, New York, NY MetLife Investors USA Insurance Company Metropolitan 5 Park Plaza, Suite Life Insurance 1900 Company 200 Irvine, Park CA Avenue, New York, NY CLVL20601 L [0310] 2009 METLIFE, INC. PEANUTS United Feature Syndicate, Inc.