In my planning with many companies over the years, I realize that many business owners are not using the corporate cash flow to create wealth outside of the business. Normally they are using their after-tax dollars to buy financial products to create a benefit for them personally.
Many of the business owners feel they need to put all their current dollars into the business. This is a mistake! The reason this is a mistake is the business equity can get tied up just like a home-equity can. At a time when the business owner needs his business equity the most, is usually at a time when he cannot get it out for one reason or another. Business equity is not very liquid as it is tied up in receivables, loans, inventory, and the like. By putting too much of the business owner’s wealth in the business, they are risking the loss of it in the future, or the very least, the ability for its use for some major cost.
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Owning a business creates opportunities to use the corporate dollars to create personal wealth outside the business. I call these benefits executive compensation. Normally you can arrange executive compensation programs to be highly effective and efficient tax wise. The corporate dollar can do more for you than the owner could do on their own personal dollar. We have many programs where the corporation is taking a deduction and creating wealth for the owner and their family which is positioned outside of the business.
Below is a project we worked on which shows the value of the corporate cash flow. The names of been changed to protect the innocent, but the case history explains how effective using your corporation cash flow to create wealth outside of your company!
The Case Of Joey Bag Of Donuts
This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business. You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came that he needed to exit his business. He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement_, and taking the wealth with you when you need it the most, can be a problem, if you do not have the right exit strategy. _
There are many reasons wealth gets lost in a business when it is sold. It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible. Therefore, he purchased his company building and put it in a separate LLC. Joey Bag of Donuts also believes in putting as much of his income into the company pension plan. Again, this plan is outside of the business.
We also taught him to have his company support whatever it can legally towards his personal lifestyle. For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through the company.
Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but did not want to use his own funds, so why not have the company support more retirement contributions?
He already had a profit-sharing plan, and he was sharing company contributions with his employees.
We decided that a non-regulated plan was the best way to go, so we developed a plan for only him. The plan is a combination of two concepts. We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).
The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.
THE PLAN: As you can see, the company made all the contributions, and took the deductions for them. Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement. He also could turn the cash into a tax-free income stream. In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000. Along with that he has a death benefit of $2,300,000 payable to his family tax-free.
THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds. All the contributions can be applied to just his account. He also has the use of the account before retirement, like a “family bank,” along with the ability to withdraw funds tax-free.[1] There would be no 10% penalty if withdrawn before 59 ½.
THE RESTRICTED PLAN: The “Restricted Plan” relates to an employee of the company that the owner wants to make a “A key person To Hold onto Forever.” This is a terrific way of giving someone a benefit with a vesting schedule, so they stay longer.
Summary: If you own a company and are not taking advantage of the CEEP program, you are missing one of the genuinely great executive benefits available to you as a business owner. The plan is flexible so you can design it to your needs.
OVERVIEW OF THE PLAN (Summary):[i] Type of Model: CEEP
EMPLOYER
Yearly Premium Payment: $25,000
Yearly Net Cost: $17,500
Total Gross Premium to Retirement: $675,000
Total Net. Premiums to Retirement: $472,500
Total Loans:
For Tax Costs: $202,500
For Interest Costs: $112,003
Net Cost of Loans: $314,503
If Loan Forgiven, Net cost: $220,152
EMPLOYEE
Annual Average Interests: $4,148.25
Loan Payoff AT Retirement:[2] $314,503
Net Cost: 0 (all funding came from Ajax Company)
AT RETIREMENT:
Rollout Amount: $94,350.83
Tax Cost on Forgiveness of loan[3]: $94,350.83
Net Cost to Mr. Joey Bag Of Donuts
ll : 0 cost out of pocket[ii]
Cash Value in policy after rollout/forgiveness: $793,4 29
Death Benefit After Rollout: $2,306,317
Tax-Free Retirement Yearly Income: $67,500
Equivalent Pretax Payout Before Taxes: $96,429
Years of Retirement Income:18
Total Retirement Income: $1,215,000
All and all, not a bad arrangement.
[1] Fund in excess of the collateralized amount.
[2] Funds are withdrawn from policy tax-free, results are “0” cost to Mr. Joey Bag Of Donuts
[3] Fund come from policy tax-free.
[i]This is only a summary of the illustration attached to this book. The illustration is a hypothetical model of how the policy would work.
[ii] This is a fully funded Employer plan. There is “0” cost out of pocket for Mr. Joey Bag Of Donuts
For a free repot on creating Wealth Without Taxes, CLICK HERE! REQUEST R2 REPORT
This report will discuss the methods which will allow your business to use its cash flow to create wealth for you outside your business at the most tax effective way of creating wealth. Executive Compensation CEEP planning is more tax effective than a 401k, 403b, or any other pension and retirement plan.
As a business owner you have the opportunity to create an amazing amount of wealth with little tax cost. Start with the report and find out how you can create your wealth and your financial security for the future.
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