C E Credit Info (live webinar only) Y ou m ust attend the e ntire webinar in order to earn the c redit ( C PE, CFP, PACE, and CLE ( for AR CA, IL, KS,

Transcription

1 The Role of Life Insurance in Business Planning: I mplications for Estate, Succession, and Retirement Planning Presenters: Denny Axman, CLU, ChFC, AEP, CFP Jeramie Fortenberry, JD, LLM Moderator: Dick Weber, MBA, CLU, AEP June 23, 2015 This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situations and the concepts presented here.

2 C E Credit Info (live webinar only) Y ou m ust attend the e ntire webinar in order to earn the c redit ( C PE, CFP, PACE, and CLE ( for AR CA, IL, KS, NJ, NY, OK, TX, )). F SP w ill report t he CFP credits to the CFP Board and will report CLE credits in those states where the provider is required to report. A certificate of completion will be mailed in approximately 2 weeks. Questions about CE credits? Contact FSP s Accreditation Department at or info@financialpro.org Denny Axman, Jeramie P resenters: CLU, ChFC, AEP, Fortenberry, JD, LLM CFP

3 Identify closely-held business issues Today s Goals Develop fact- finding questions to help owners identify objectives Use a case study to illustrate planning solutions Learn how to help business owners plan effectively and understand how life insurance can help them achieve their objectives Some Interesting Statistics Number of businesses in the U.S. is 13.5 million 80% are small businesses (fewer than 20 employees) Small Businesses 80% US Business of Statistics 2008 Source:

4 Interesting Statistics Less than 1/3 of small businesses pass to second generation and less than 5% to third generation* 19% of family business owners have a will as source of estate planning** Only 37% have written a strategic succession plan** * Business Week March 2, 2010; businessweek.com ** Raymond Institute American Family Business Survey, 2003 Why Business Owners? Higher-net-worth clients Variety of needs to be addressed Excellent source of referrals and networking opportunities May prefer to work with local entrepreneurs

5 Case Study -- Over the Hill Senior Living Center Group of Nursing Homes Owned by three brothers Ages 68, 67, 46 Salaries from $ k President, VP, Mktg Director Key employee (Ops. Mgr.) 11 full-time employees 10+ contracted employees / Assisted Living Facilities Fact Finding Questions What are your back- up plans in the event one of your brothers is no longer around? Are any of your heirs prepared to take over the family business? How much income could be lost as a result of a key employee s death? Are you prepared to run your business with your brother s spouse? What is your overall plan?

6 Phase 1 -- Business Succession What would happen upon an owner s death? Concern Without a plan, co-owner could be deceased s spouse Spouse Company Stock Phase 1 -- Business Succession Solution -- Stock redemption -- Cross- purchase -- Wait & See The buy- sell agreement to be funded with life insurance Cross- Purchase Plan Selected Death Benefit Spouse

7 Objectives Achieved with Life Insurance Available cash for business to buy out deceased partner, or partially fund a living buyout For deceased s family, value of stock replaced by cash Surviving partners can decide who they want to own and run business Business valuation What Is Your Business Worth? How much do you think your business is worth? How much is your business worth as a cash equivalent? How much could you sell business for in a forced liquidation? Obtaining a business valuation

8 Valuation Issue Determining the Value Do it your way (how much would you sell it for today?) Do it using a Diagnostic Tool (Present value of cash flow plus goodwill) Let a professional do it for you (CPA or third- party business valuation firm) Why raise the issue? Business Valuation Disturb business owners to initiate action Uncover multiple planning opportunities

9 Phase 2- - Key Person Besides yourselves, who is invaluable in your business? Concern --Operations manager is vital to the business Solution- - Key person insurance policy on life of operations manager Objectives Achieved with Life Insurance Immediate infusion of cash Possible to combine with a non- qualified deferred compensation plan Extra funds can be used to Stabilize business during time of lost revenue Aggressively recruit and train replacement Pay a non- qualified benefit to key employee s family

10 P hase 3 Retirement Planning Have you saved enough for retirement? Concerns Establish retirement plan Minimize cost of employee contributions Increase overall tax deduction Challenge -- needs/goals Brothers have differing retirement savings Solution = Flexibility 401k/Profit sharing plan 5% profit sharing contribution to each brother* 3% profit sharing contribution to key employee* 9% profit sharing contribution to employees* Cash balance plan Customized retirement plan benefit for each partner All employees included in cash balance plan *Percent of salary received as profit sharing contribution.

11 Hybrid defined benefit plan What is a Cash Balance Plan? Looks and feels like defined contribution plan Provides guaranteed pension income DB Plan Cash Balance Plan DC Plan How does it Work? Hypothetical account Statements report account balance rather than monthly pension income Similar to IRA or 401(k) Defined benefit plan Employer contributions Monthly pension income IRA rollover option

12 Why Cash Balance Plans? Easier for participants to understand Flexibility in plan design Potential to create separate classes Benefits companies with multiple owners different retirement savings goals with Why Life Insurance in a Qualified Plan? Self completion Portability Pre-tax dollars Tax-efficient death benefit

13 Profit Sharing and Cash Balance Plan Contribution Results Profit Sharing Contributions Cash Balance Plan Contributions Total Plan Contributions Life Insurance Premiums* Partner 1 $ 12,250 $ 246,545 $ 258,795 $112,228 Partner 2 $ 12,250 $ 75,942 $ 88,192 $29,790 Partner 3 $ 12,250 $ 107,530 $ 119,780 $48,950 Key Employee $ 7,350 $ 38,628 $ 45,978 $14,888 Employees $ 35,732 $ 6,484 $ 42,216 $3,328 Total $ 79,832 $ 475,129 $ 554,961 $209,184 % to Partners/ Key employee 55% 99% 92% 98% *Premiums and the hypothetical whole life policy to which they re paid are for illustrative purposes only. Have you positioned your wealth to maximize its benefit to your loved ones? Solution Legacy planning with a dynasty trust funded with life insurance; IRA stretch-out strategy Phase 4 Individual planning with two brothers

14 Additional Planning Opportunities Manage IRA assets of each brother One brother s spouse part of a law firm Established cash balance plan for partners & staff Individual planning done for firm s partners End result of setting up cash balance plan Total of $14 million in assets transferred Business Owners Critical Issues Each issue represents a question/goal of the business owner Each issue represents a planning opportunity to provide solutions Legacy Planning Succession Planning Questions Goals Retirement Planning

15 Value of Comprehensive Planning Address clients critical issues Offer planning options that take into account various planning issues Seizing the Opportunity Contact existing business owner clients Ask the fact- finding questions Address business owners critical issues and offer planning options

16 Q&A Thank you for attending! For more info: