Buy Out Funding, Buy-Sell, Business Succession and Death Benefits. Lawrence L. Bell JD,LTM,CLU,ChFC,CFP,AEP ADVISORS,LLC.

Transcription

1 Buy Out Funding, Buy-Sell, Business Succession and Death Benefits Lawrence L. Bell JD,LTM,CLU,ChFC,CFP,AEP ADVISORS,LLC.

2 Estate and Business planning issues Estate liquidity,equalization,income replacement,special needs BuySell Arrangements,Business Continuity,Suceesions Planning Buyout of Principals in Professional Service Firms and other multiownership arrangements Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 2

3 Problems Opportunites? Multidisciplinary Platform Regulatory compliant Economcially efficient Elegantly Simple Using Actuarially based solutions Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 3

4 Multidisciplinary Platform Accounting Tax Legal Financial Actuarial Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 4

5 REGULATORY COMPLIANT Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 5

6 Group Life Insurance Overview Combination of a DBO and 79 Plan 1. Employer and employee enter into beneficial arrangement to provide death benefit during employment 2. Employer funds life insurance program over working lives. 3. Program is treated as a GTL Program for benefit purposes. 4. Group Term Arrangement uses a Co-Ownership format to provide basic and supplemental coverage under the Program. 5. Program provides death benefit only coverage during years of employment. No portability. 6. Program contributions based on an actuarial methodology. 7. Plan sponsor Employer contributes cost of death benefit on a tax favored basis. Employee contribute on an after-tax basis. 6

7 Regulatory Overview Combination of Death Benefits & Supplemental Funding 8. Employees & Principals taxed on economic benefit using Table I for both income and gift tax purposes. 79(c)(1) and Rev.Rul Permanent life insurance contracts are integrated with a Co-Ownership Agreement.TAM Cash value accrues on a tax deferred basis. 11. Table I (economic benefit) stops when are no longer made. 12. Death benefit is Income and potentially Estate tax-free. (See ILIT/ILP) 13. No transfer/taxation upon termination of arrangement IRC permits access cash value on tax-free basis through policy loans and withdrawals for several planning purposes: A.) Supplemental retirement income. B.) Golden Handcuff arrangement for junior participants (results in an additional tax deduction for Employer. C.) Financial basis to fund deferred. 7

8 Hierarchy of Tax Reliance CODE REGS The DBO follows these steps you want to track Rev. Rul., Rev. Procs TAMS IRS NOTICES Court Cases COLI BEST PRACTICES 101(j) 409A Split Dollar Rules 66-22(d) Funded Welfare Benefit Rules IRC Sec 79 PLRs Opinions 8

9 Tax & Legal Building Blocks for DBO Building Block 1 Plan meets the requirements of IRS for Life Benefit A. Basic Infrastructure of IRC Treas Reg (v) (1) It provides a general death benefit that is excludable from gross income under 101(a). (2) It is provided to a group of employees. (3) It is provided under a policy carried directly or indirectly by the employer. (4) The amount of insurance provided to each employee is computed under a formula that precludes individual selection. B. Tax Deductibility in Year of Contribution Employer contributions made to the Plan & should be allowable as a deduction under 162(a), in the year + 75 days in which such contributions are made. Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 9

10 Tax & Legal Building Blocks for The Unique Solution Building Block 2 Group Benefit Segment actuarially determined annually. Complies with definitions of Reg Safe harbor (c.) A. Valuation provided annually to support the cost of the current death benefit B. Actuarial Equivalent - Stable Value Funding Building Block Economic Benefit is Table I A. Income Tax - The measure of imputed compensation income to the employee receiving death benefit coverage under the Plan may be based upon the guidance issued by the IRS in Table I as a group-term life benefit. B. Gift Tax - Transfer tax to employee is Table I Values C. Employee has right to death benefit Citations: 1. Reg Wells Fargo, 120 TC 5 (2003) 3. Rev. Rul IRC Sec 79(c) 5. Reg (d)(2) 6. Reg. 1.79(d)(3) 7. Reg (d)(2)(ii)(A) 10

11 Tax & Legal Building Blocks for The DBO Building Block 4 Both Group Term & Supplemental Funding segment qualify as life insurance Program may be split into two parts basic and supplemental. Selected Employee may pay for supplemental portion with aftertax dollars. Both segments treated as life insurance. Contributions are deductible to business and not taxed to employee. Building Block 5 Employer or Employee retains supplemental funding segment complies with definitions of Reg Safe harbor (b) and Rev. Rul A policy meets this requirement if the employer pays any part of the cost (directly or through another person). The policy may be a master policy or a group of individual policies. The term policy includes all obligations of an insurer that are offered or are available to a group of employees because of the employment relationship, even if they are in separate documents. The employee contribution is a direct credit against Table I costs to covered employee. Citations: 1. TAM IRC Sec 7702(a) 3. TAM PLR PLR Rev. Rul Reg

12 Tax & Legal Building Blocks for The DBO Building Block 6 Executive Group Carve out complies with 79 and Table I taxation to employee Building Block 7 Split Dollar Rules do not apply under final split dollar regulations for program covered under IRC 79 (1) Meets four requirements of Group life plans Reg (a) (2) Meets requirements of Reg (b) regarding permanent benefits Citations: 1. TAM PLR PLR Reg (a) 5. Reg (b) 6. Reg Reg (b)(2)(ii)(A) 12

13 Tax & Legal Building Blocks for The Unique Solution Building Block 8 Transfer tax ends when employer no longer funds and supplies benefit to employee Reg (c) period of coverage Building Block 9 Income and Transfer tax ends when employer no longer funds and supplies benefit to employee.reg Citations: 1. IRC Sec 83(e)(3) 2. Reg (c) 13

14 Availablity to Pass Thru Entities Benefit Program works for LLCs,LLPs, Partnerships and S-Corps The Principals can own the supplemental funding segment Upon termination of employment no transfer, no tax, no reporting under Co-ownership arrangement No further funding no economic benefit no further tax Principal as owner of policy can access CV by ways of loans and advances of death benefit upon termination of funding Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 14

15 ECONOMICALLY EFFICIENT Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 15

16 Example 1 3 principals +120 employees Provide $30MM death benefit for each Principal Provide actuarially determined equivalent benefit for rank and file Rank & File receive $160K GTL,can waive coverage and it still counts for equalization formula Employer contributes Principal annually 20 years effective tax rate 2% Principals retain ownership of policy upon withdrawal. Receives $17.5 MM tax free over 20 years Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 16

17 ILP/ILIT 1. Insured-owner (I-O)of policy creates LLC 2. I-O of policy takes back Managing Members interest (MM) at 1% and Limited Membership (MM) 99% 3. I-O contributes Supplemental funded policy to LLC after tax contribution to LLC 4. 1-O as employee of employer assigns death benefit under Group Life Plan to LLC. Gift tax based on economic benefit (Table I or Table 2001 on face amount of coverage (Rev Rul ) Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 17

18 5. LLC agreement permits members to borrow from the partnership to the extent they have sufficient asset to secure the borrowing 6. I-O gifts LLC interest to natural objects of their bounty 7. I-O as MM can take loans from LLC not income to I-O 8. I-O can transfer title to LLC to Revocable Trust to avoid Probate 9. $ owed to LLC is a debt on Estate Tax return 10. I-O interest in LLC on Estate Tax return is 1% of face of policy. (Rev Rul ) Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 18

19 457(e)11 Final Regulations 6/21/2016 provide roadmap and safeharbour 38 years after deferred comp rules for nonprofits became law Avoids 457(f) risks of forfeiture Complies under 457,457(f),409A, (v) Qualifies to convert deferred compensation 19

20 ɸ deferred compensation Covers selected employees independent contracts and B/D ɸcompensatory ɸ an ERISA plan think top hat 20

21 457(e)11 Plan identifies beneficiary Spouse of insured If no spouse under terms of insured s will 21

22 How it works Plan Sponsor ɸ incidence of ownership ɸ borrow or direct beneficiary Insured employee or independent contractor ɸ incidence of ownership ɸ borrow or direct beneficiary Co ownership When insured withdraws from plan under co-ownership arrangement Plan Sponsor no longer funds annual actuarial amount. Insured retains policy Citations: 1. IRC Sec 79(a) 2. Reg IRC Sec 79(d)(2)(A) 4. IRC Sec 162(a)(1) 5. Treas. Reg (a) 22

23 Prospective Plan Sponsors Non Profit Organizations Hospitals NRECA members Blood Banks Trade Associations Citations:) 23

24 ELEGANTLY SIMPLE 24

25 Qualified Candidates Cos. With Defined Benefit Plans fully funded &UFP Gross Revenues $12MM + Fiscal year ends now Calendar year in September 50+ employees Professional Service Firms 25

26 Conclusion The DBO complies with the hierarchy of tax authority. It is a statutorily based program dependant upon the IRC and Regulations in order to reach it s results. On that basis, The DBO does not face any material obstacles. 26