Financial. What s Inside:

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1 Cincinnati Chapter FSP Solutions for a Secure Future (formerly the American Society of CLU & ChFC) Financial BOARD OF DIRECTORS President Ernest J. Martin, CLU, ChFC, CFP emartin@theonfgroup.com President-Elect/VP Of Membership Andy F. McClintock, CLU, ChFC amcclintock@cinci.rr.com Secretary/Treasurer Donna K. Sinor, CLU, ChFC, JD pascarella_dennis@nlvmail.com Immediate Past President W. Jeff Martin, CLU, ChFC jeffmartin@finsvcs.com Director of Programs Thomas J. Wilson, CLU, ChFC thomas_wilson@glic.com Membership Chair Stephen P. King, CFP, CLTC king_stephen@nwmail.com VP of Education Dennis E. Pascarella, ChFC amcclintock@cinci.rr.com Continuing Education/VTC Alex Mills,, CLU, ChFC, CEBS amills@kdkfs.om Pro News and Information Letter of the Cincinnati Chapter Financial Pro, Volume 28, Number 9 September/October 2007 What s Inside: President s Podium FSP Forum Buy Sell Planning in a Family Held Business SFSP Meeting: Employee Benefit Plans: On the Rise or On the Wane? In Succession Planning, Do Advisors Practice What We Preach? Communications Chair James LeBlond, CLU, ChFC jimleb@cinci.rr.com Public Relations Chair Joseph F. Stenken, J.D., CLU, ChFC jstenken@nuco.com Cincinnati Chapter 4100 Executive Park Dr. #16, Cinti, OH Phone: Fax: SocietyofFSP@aol.com

2 Page 2 President s Podium Greetings to members and friends of our Cincinnati Chapter of SFSP: I view the year ahead as an opportunity year, a year to strengthen and in some cases reestablish our value to financial professionals of our community. We begin with an active board of directors energized and committed to this common goal. Leadership provided by our executive committee Jeff Martin, Andy McClintock, Dennis Pascarella and Donna Sinor is here to serve you. Our directors, Stephen King, Jim LeBlond, Alex Mills, Joe Stenken and Tom Wilson round out a winning team. Any successful organization needs active participation of its membership in order to preserve its status and grow with change to serve in the future. Please consider doing just one thing on behalf of the chapter this year to strengthen our future. This could be bringing in a new member, host a meeting, becoming a sponsor, serving on a membership team effort, promoting SFSP in your firm, you get the idea. Help us keep Cincinnati a leading chapter in the Society of FSP. Our program season kicks off on September 25 th with Bill Freedman Employee Benefit Plans on the Rise or on the Wane? followed by a presentation from Donna Sinor and Chuck Osmond on October 30 th. The Society Video Training Conference program is scheduled for November 13 th. All of these programs provide CE credit, including CFP CE credit. The programs and CE opportunities are selected for the benefit of our membership and are offered to you at no charge. We encourage nonmember guest attendance and have established a minimum fee of $50 each per meeting. Should a guest decide to join SFSP we will apply the $50 (max) to the first year dues. Hope you had a great summer and that I will see you at the September meeting. Ernie Martin, CLU, ChFC, CFP President Ernie Martin

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4 Shopping Impaired Risk Products By: W. Jeff Martin, CLU, ChFC As a planning professional, you know the importance of making sure business clients have a written buysell agreement. Perhaps no other business document is as important because it provides a roadmap for the remaining owners to guide them through what will happen in the event a shareholder(s) must sell. Notice I did not say surviving owners, because many other events might trigger the need for a stock sale: Death Disability Retirement Divorce Bankruptcy Voluntary Termination Involuntary Termination Too often our sales discussion focuses solely on a potential shareholder death and it may lessen the importance of a buy-sell because the owner may be willing to chance the likelihood of a death among owners is relatively remote. A buy-sell agreement should be much more comprehensive in its coverage. When studies show that less than 50% of businesses have a written buy-sell, a serious look at the bigger picture is critical to motivate the prospect to take action getting the document drafted and signed. If there is a written agreement in place, it should be reviewed for its current relevancy and to be sure it is the right type of buy-sell for the situation. When the business is owned solely by family members, planning takes on a new dimension. It is important to know what a buy-sell can and cannot do in a family owned company and it is vital to always ask for permission to review the actual document. Don t assume the owners know whether they have a crosspurchase or stock redemption agreement or know the difference. It is also important to never just assume the individual who drafted the document is well versed in attribution rules, that the document isn t out Page 4 Buy sell planning in a family held business of date or even if the most well crafted buy-sell was actually signed by the owners. It is a great opportunity to build your credibility and referral business to attorneys skilled in drafting such agreements. The Internal Revenue Code (Sec 301) says any sale of corporate stock by a shareholder back to their company is considered a dividend unless it meets an exception under Section 302. The challenge is to prove the sale fits one of the exceptions so the seller is not taxed at ordinary income rates on the sale (vs. the lower capital gains rate). One of the key exceptions is under Section 302(b)(3) where a sale can qualify if the redemption is total and complete. That standard can be exceptionally difficult in a family owned business and is full of pitfalls the insurance agent should know about. Thus, tt becomes a critical fact-finding point to know the exact breakdown of stock ownership. So let s say the family widget business has 1000 shares of stock outstanding. Dad is retiring and sells all 900 of his shares and their #1 child now running the business keeps his/her 100 shares. There are now 900 Treasury shares and 100 outstanding shares and the sale was total and complete sale right. Dad will get to treat the gain as a capital gain and not ordinary income. Wrong. In the eyes of the IRS and under family attribution rules, Dad is deemed to still constructively own the 100 shares of his child. In a family business where there is a linear family relationship among the stockholders, (father mother children grandchildren), shares can be both actually owned and constructively owned. This concept is called Family Attribution. Please note that family at-

5 Page 5 Buy sell planning in a family held business continued tribution does NOT extend between siblings so attribution will not be an issue among a business owned solely by brothers and sisters. Family attribution rules mean the IRS will attribute any shares fully owned by his wife, child or grandchild to be constructively owned by this father. Thus, the father could never completely sell out of his shares in the company (in the eyes of the IRS) because he will always be deemed to constructively own the 100 shares still held by his child. (even if he sells back 100% of the shares he personally owned). The IRS is saying even if the father sells all his personally owned shares, he still exerts enough influence over close family members in the business that he constructively maintains control. It is important for the planner to know that family attribution exists and it creates a potentially critical hurdle in planning for a family business with lineal owners. Does the type of buy-sell really matter? Planners advise you should NEVER use a Stock Redemption or a Wait & See Agreement in a family owned business because of the aforementioned family attribution rules. Always use a Cross Purchase. Remember that the cross purchase is a transaction between two or more individuals and does not involve the business. Thus family attribution does not apply because the shares are not being redeemed (retired to Treasury Stock); they are being sold to and held by another individual. You should also be aware that one of the traditional advantages in doing a buy-sell agreement (pegging the value of the business for estate taxes) will likely never materialize in a family owned business. The IRS will ignore formulas, stated valuations or other share value measurements for estate tax purposes because they will assume the value was not a true arms-length transaction and challenge most valuations. Even if the value was arrived at thru an independent appraisal, the IRS will assume the family could have cooked the books rendering the appraisal as less than accurate. An appraisal certainly helps but the family should expect an IRS challenge. An excellent resource to carry with you is the book Field Guide, published through National Underwriter. It contains simple to understand explanations of these key issues and is an excellent investment in your practice. More on Buy-Sell Agreements next month! Good Selling!!! W. Jeff Martin, CLU, ChFC jeffmartin@finsvcs.com

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7 In Succession Planning, Do Advisors Practice What We Preach Page 7 By: Linda Glantz Murray Financial advisors know the importance of succession planning for their clients. Foundational to completing a financial plan for any business owner is an in-depth conversation about succession management: Business continuation plans and buy-sell agreements need to be implemented and funded. But what about the financial advisor s practice? Do we as an industry practice what we preach? The UNIFI Companies have distribution partners who offer succession management stories from practices that span generations of service. Here, we look at two of these businesses a family-centric operation and a mentor/apprentice practice and explore the insights we can glean from them. A family affair When R. David Wentz founded Tax Favored Benefits in 1980, he had no idea of the organization it would grow to become. Headquartered in Overland Park, Kan., the firm specializes in retirement plans, employee benefit programs, risk management and investments. Today it has more than 700 corporate clients, thousands of individual clients, 8 in-house producers and 30 support staff associates. Family members at the firm include R. David s son David B. Wentz, daughter Audrey Wentz Chinnock and sister Cynthia Richter. There are many nonfamily key executives as well, and several successful young producers who joined the firm have become an integral part of the organization. With such a dynamic team, R. David was confident his clients would be taken care of when he was absent from the office and when he died, retired or became disabled. So for several years he did not completely address the issue of succession planning. It was his children who finally triggered the topic; David B. and Audrey needed to know more specifically what the plan was if their father passed away. So 5 years ago, the family members started with internal discussions, which then led 3 years ago to more formal planning. They used an outside consultant, who spent approximately 8 days over two years with the family and various staff members; they also attended seminars. Today, the organization has a written succession plan that is part of the estate plan and is funded with life insurance. It consists of various milestones and continues to be a work-inprogress. When David B. and Audrey joined the company, R. David thought it was critical they spend their first years building up their own book of business. But for succession planning, different activities were necessary. For Audrey, learning the HR and internal operations side of the business was a milestone in her preparation. David B. took over management of the sales force several years ago. Additional key milestones have been defining their roles as chief operating officer and president. This has allowed R. David to greatly reduce his involvement in business operations. David B. now handles marketing operations and Audrey handles the day-to-day operations. Cynthia oversees the plan administration side of the business and Executive Vice President Bill Stapp is integral in business negotiations. Additional management duties have been delegated to the director of finance and office manager. That doesn t mean R. David doesn t stay busy. He is

8 Page 8 In Succession Planning, Do Advisors Practice What We Preach continued still ultimately involved and maintains an intense client appointment schedule. His goal is to gradually diminish his involvement each year over the next 4 years, when he will reach his desired retirement age and will only devote time to certain clients. To that end, the leadership team meets regularly and the written succession plan is reviewed each year. If you are considering a succession plan for your organization, Wentz s recommendations are: --Start sooner rather than later. --Begin discussions as soon as it is an issue. --Begin the process of a more formalized business operation with greater delegation early. --Bring in a third party/consultant to help guide the discussions. --Try not to discuss business at family gatherings. A mentor and his apprentice Manuel Manny Martinez answered a blind ad in 1976 when he was fresh out of college and unemployment in southern California was 14%. He joined Lincoln National, who supplied him with leads and taught him the planning process. In his first year in the business he won the high Career Club award; and what he originally thought was a short-term stopover in his career became a lifelong passion. Manny continued to practice holistic planning and built an impressive practice. His clients are typically business owners with annual incomes of $300,000 to $2 million and whose needs include tax planning, deferred compensation, charitable gifting and other areas. Then at age 45, Manny had a jolting wakeup call: His appendix burst and he almost died. At that point he had no succession plan or any immediate prospects to bring into the business. It made him recognize the need to have a backup plan for his clients. Shortly thereafter, attending a client s

9 Page 9 In Succession Planning, Do Advisors Practice What We Preach continued daughter s wedding, Manny met Kenny Winter. Kenny, the son of another client, was a recent finance graduate and was beginning to explore career opportunities. Manny was immediately impressed with Kenny s moral fiber and within a week, they had sealed the deal for Kenny to move to Southern California and join Manny s agency. they do share a passion for their work, respect in the industry, and an ongoing commitment to their clients. One of these models may be right for your practice, or maybe a hybrid. Whichever is the case, the primary lesson I learned is don t delay this important work. These individuals had the foresight to plan accordingly and so can you. Manny established an apprentice program that more closely resembled a junior accountant or law firm structure than the typical insurance or financial planning system. Kenny joined him in every client meeting, taking copious notes and learning Manny s relationship-focused planning style. From day one, Manny shared a percentage of every case with Kenny, a rare occurrence in this industry. Manny believes that you have to provide a decent living to recruits you are cultivating so they can focus on developing their own expertise. Each year as Kenny assumed more responsibility, the percentage increased. Linda Glantz Murray is second vice president, product marketing, UNIFI Companies. You can her at Linda.Glantz@acaciagroup.com. Reprinted with permission of The National Underwriter Company. National Underwriter L&H, September 3, Today, Kenny is an integral part of The Martinez Agency. He and Manny still meet every new client together as a team and Kenny has developed specialized expertise in business organization structure and tax planning. When the phone rings in the agency, 6 out of 10 calls are for Kenny, which gives Manny peace of mind that his clients would be in good hands if he were absent from the agency. Manny s goal is to eventually slow down, transition out and transfer the general agency to Kenny. There is a written plan in place to accomplish this goal, but Manny admits they need to review it more often. Not that Manny has any immediate plans to retire. At 58, he is going strong, the agency is growing and he still has plenty to teach. In fact, business is growing so well, they added staff and a second apprentice has joined the agency and will be nurtured and mentored in the same fashion as Kenny. Don t delay These two businesses couldn t be more different in terms of size and structure, but

10 Page 10 Welcome To Our New Members! September 25, 2007 Employee Benefit Plans On the Rise Or On the Wane? Horan Conference Center Sonya E. King, JD,LLM The National Underwriter Co Olympic Blvd Erlander, KY (859) Michael J White, JD,CLU,ChFC Union Central Life Co 1876 Waycross Rd Cincinnati, OH (513) mwhite@unioncentral.com Dan Shick, JD Union Central Life Co 1876 Waycross Rd Cincinnati, OH (513) dshick@unioncentral.com John Lucas, JD Union Central Life Co 1876 Waycross Road Cincinnati, OH (513) jlucas@unioncentral.com Liz Martini, JD Union Central Life Co 1876 Waycross Road Cincinnati, OH (513) lmartini@unioncentral.com Mark Your Calendar for these upcoming SFSP events! 4990 East Galbraith Road 8:30a.m. 10:30a.m. October 30, 2007 You may attend one, two, or all three programs: 8:00am-8:50am Retirement Income Solutions 9:00am-9:50am Life Insurance+Retirement=Risk Management 10:00am-10:50am-Retirement Solutions for Business Owners Speakers: 8:00am Donna Sinor 9:00am Tom Eck 10:00am Chuck Osmond The Guildford Institute 421 E. Fourth Street November 13, 2007 Video Teleconference : Annuity Strategies in Financial Planning Horan Conference Center 4990 East Galbraith Road Time: TBD