Treating Your Children Equally Or Fairly!

Leaving assets Equally or Fairly!

The One Page Issue

The Issue Overview:    

Parents want to leave different property to their two children. Son A is in the family business, while Son B is a teacher. They also want to update their estate plan.  

Break down and fact pattern:  Family owns a business worth approximately $3 million (ballpark guess by accountant, but not a certified appraisal).  The account has suggested that the owner get a certified appraisal.  There is a building worth $800,000 that houses the family business, and residential real estate worth about $1.5 million.  Their home is valued, $500,000, and an investment worth about $600,000.   Their net worth is approximately $6,400,000.[i]

Rents and salary are where the family derives their income.

The rental income profits are being invested back in the real estate to pay down the mortgages which will be paid off in five years.  

Intention of estate owners; Specifically, at the death of the surviving spouse, Son A is to receive the business and the business property.   Son B is to receive the real estate and residence. The investment account balance to be split equally.    

Past Planning:  The parents have done very little estate planning. They have an old, “I love you will” and do not have healthcare directives in place.  

One Page Issues:

Summary of Issues:  

A. Upon dad’s death- the status of mom and her income. 

B. The real estate other than the business building to Son B. 

C. Distribution of business assets to the son A

D. Estate settlement costs and taxes.

ONE PAGE SOLUTION!

One Page Solution (s), things we suggested to consider:

  • Certified evaluation of the business as a watermark of value, for a variety of things.
  • Update wills, possibly a living trust (Qtip/bypass) and Medical Directives
  • Placing real estate in Irrevocable defective grantor trust   with spouse as income beneficiary (Defective Grantor Trust) remove from estate and future value[ii].  
    • Parents are not concerned with making gifts. (See footnotes).
    • Parents are aware of a possible reduction in the exemption credit.
    • There is also the issue of the loss of stepped-up cost basis in the future because of future tax law changes. 
  • At spouse death, Son B can receive the investment property. Son B will receive the commercial building and the business.  
  • If more cash is needed in the estate, the business could fund a life insurance policy on Mom and dad (2nd to die) to absorb taxes and transfer costs.  Using the company to fund the policy via a split dollar or bonus plan. If so, the life insurance would be purchased by an irrevocable trust.  

Overview

These were a a few of the strategies the family could do to improve their situation, although there are many more ways to plan their estate.  Most important, this was the direction the family felt more comfortable after reviewing other possibilities.  Compared to the default estate plan they had; this planning puts them in a much better position to accomplish their goals. 

Bottom Line:  

  • The spouse will have the income needed to stay in her world. 
  • Son A received the company along with the building. 
  • Son B is treated fairly in that he receives the real estate and income from the real estate.
  • It also works well if the mother passed first.  The only exception would depend on the value of the stock which the father owned at his death.  Currently, he owns 100% of the stock.  (Once the business value is known other planning strategies could be implemented to save taxes and accomplish their financial goals as a family.  Things such as using minority stock discounts, recapitalization, estate tax funding with life insurance, gift programs, along with other techniques to accomplish the personal family goals).

Take our free SCOREBOARD ONE MINUTE ASSESSMENT. AFTER YOU TAKE IT, WE WILL SEND YOU A FREE ASSESSMENT REPORT.  IT WILL HELP YOU IDENTIFY WHAT AREAS IN YOUR BUSINESS GROWTH are strong and what areas you need to work in to maximize your full potential business value.  CLICK TO GET


[i] Business needs certified appraisal- current value is an estimate

[ii] We are considering current tax laws; however, we are on the verge of a possible lowering of the exemption credit and repeal of the stepped-up basis

Reasons They Do Not Have A Transition Plan That Will Be Efficient – Part 2

Over the years, my experience with many owners I have found a major conflict with owners is the working in their business vs. working on their business. It is extremely hard for many business owners to make changes and spend the necessary time. I have a book called “Unlocking Your Business DNA”, which discusses the personal tragedy of not having the proper planning.  

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA 

I have heard the stories from “I will live a long life”- “I need to work and won’t retire” “No one can do this like I can”   

Four possibilities of leaving your business:  

  1. Death (that includes dropping dead at your desk) 
  1. Disability 
  1. Retirement 
  1. Cannot do it any longer 

By not planning, the owner may find themselves receiving much less for the business, walking away without any value, or just die working at their “bench.” 

Because of this one reason, we developed the two hour a month planning process, called:  THE ONE PAGE PLANNING PROGRAM.   

The Owner AND Their Issues:  What is important for the owner is to have a personal retirement and estate plan to define their future needs. Do they want to stay active in the business even when retired? Will they have enough money for retirement? Will they have estate tax exposure. Do they have the proper estate documents? Do they have someone to sell the business too? How much will they have to sell their business for to net the amount of assets needed to provide their financial security? 

Owner Issues 

  • Financial Security 
  • Wealth Preservation and transferring the business with as little taxes as possible.  

The Family: What is the status of the family relationships in the business? Do any of the family members depend on the business for income?  Do they own stock? Are they in agreement with the proposed succession?  Are their careers involved with the business? 

Key Issues for family  

  • Compensation among family members in the business?  
  • Inheritance among family members?  
  • Management of family business, who is involved?  

The Company. 

  • What are the assets in the business? What is the value of the assets? What is the value of the business?  
  • Has the company been appraised in the last few years? 
  • Is the buy and sell agreement in force-signed and dated?  
  • Does there need to be more formality in the governance of the structure? 
  • Has there been a systematic attempt to enhance business value drivers over the years? 
  • What is the structure to get earnings out on a tax advantage structure?  
  • Who will be the leader of the company, and will there be a change in ownership? 

The Succession Plan 

  • Business Situation and questions when thinking about succession. 
  • How are you getting earnings out of the company on a tax advantaged structure?  
  • Have you considered the leadership and owner issues to be addressed?  
  • Each entity structure has advantages and disadvantages, and each should be looked at carefully when considering your future status as you transition? 

FOR A FREE EBOOK; REQUEST UNLOCKING YOUR BUSINESS DNA 

The Challenges Of Developing A Transition Plan For Small Business Owners- Part 1 of 2!

Many small business owners do not have a plan for the transition of their business. A survey taken a few years ago suggested that only 30% of the small business owners had a transition plan. Out of the 30%, only 50% had a plan in writing. Of those plans, there is no way of telling if they were set up correctly, outdated, or even funded, considering the changing of the business status.  

 Options available for business owners for the transition of their business:  

A structured succession plan would enable the business owner to achieve their personal financial goals as its primary function, which would be to create a satisfactory income, and security for their future. 

A second goal would be to maximize the greatest potential value for the business, which would help the owner with their financial needs in the future, such as retirement.  

Another goal would be the long-term growth and the survival of the business to support family members for the future, key employees, or if the owner wishes to remain attached to the business, as a passive owner.  

One of the key issues is to make sure the business owner has control of the process and has defined the timing of any transition in the future.  

For example, if the owner wants to retire in five years, they must make sure they have implemented proper value drivers to maximize the company value.  Some value drivers take longer than others, such as building the next level management key group. This is the group that may wish to purchase the business at some point or run it for the owner.  

By not implementing this strategy early, the owner may be forced to delay the sale of the business until the strategy is developed, consequently jeopardizing their retirement plans.    

If the business is to be sold outright, there needs to be other quality value drivers working for the business owner to maximize the potential sales price.  

Overall, by not having a succession plan, and awareness of what value drivers need to be implemented, the owner risks not achieving the highest potential value for the business while weakening the ability to time and control their transition from the business.   

 Problems of not having a solid transition plan:  

  • Family equity issues 
  • Income and estate tax exposure 
  • Risk not creating the culture of retaining key persons and family members 
  • Uncertainty for people who have a stake in the company (investors, family members, long-term employee, as an example) 

For small privately help businesses, a succession plan is very personal, and cannot be a template program, as every company is unique, and the owners’ situations are very different. 

The key to a successful transition is having a solid plan which has an orderly process and is tax efficient.   

LEARN THE FOUR WHAT IF QUESTIONS EACH BUSINESS OWNER HAS AND HOW TO AVOID THEM BY REQUESTING THE WHITE PAPER:  CHAOS-THE BIG STORY; REPORT #4.  

Selling Your Business To The Younger Generation!

I am old enough to remember the many small businesses in my hometown. There were all types of businesses such as, meat markets, hardware stores, small groceries stores and many specialty stores. Large shopping centers and malls were just starting to appear, as they would be the future home of many of the smaller stores along with the big chain stores.    

FREE OFFER:  Receive my free E-book;  “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE 

It was the fifties and small business was booming. There were many reasons for the business boom, but mainly it was the population of the baby boomers which gave way for opportunities to buy or start a business.   

Now over 60 years later, things are changing. The boomers that started the businesses are now older and would like to retire and sell their businesses.   

Baby boomers own 2.34 million small businesses and employ more than 25 million people (about the population of Texas)i. This represents about 100 million citizens when you consider family members.   

Incomplete Plans 

A recent surveyii shows that 58% of small business owners have not only failed to complete a succession plan, but many haven’t even considered a transition plan. The significance of this figure is the potential catastrophic effect on our economy as the boomers burn out, die, or become too ill to work. Other studies tell us that only 30% of business owners have a succession plan, and 50% of them are incomplete plans.  

The impact of this lack of planning not only affects the consumer, but also employees, family members, partners, independent contractors, part time workers, down the line suppliers, an endless road of dependence on each business.   

Even the younger generation business owners are affected by the closing of these businesses, as the younger business owners have a type of dependence on the success of the boomer’s generation of businesses.   They rely on these established businesses as suppliers, mentors, etc. 

Receive my free E-book;  “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE 

Younger Generations 

Interestingly, many younger generations are not interested in running the family business. They have seen the sacrifices their parents and other family members have made over the years; they don’t want to spend all the time necessary to run the business.   

This generation, beginning with the babies of 1965 and continuing through 1984, is a big problem for Boomers, who are preparing to sell their businesses. The issues are three-fold: numbers, values and choices. 

A major reason for the potential problems for baby boomers is in the pure number of them. From 1945-1964 there were many baby boomers born during that period which stemmed the growth of the economy. However, the next generation is about 23% less in population. This means there are less people in the younger generation to purchase businesses.   

In the next 4-6 years, when the last of the boomers hit 65 years old, almost 5 million fewer people (23%) will be turning 45, and entering their prime business buying years. This shortage of buyers will create the worst imbalance between small business sellers and buyers in history, and it will continue for the next 20 years.iii 

Values 

Boomers have a vastly different work ethic than the Generation X’s. Not that they are lazy, but their values of working, when and why, are very different. Because of these values there are many Generation Xer’s who don’t wish to have the same work schedule their parents had.   

Generation Xers want to define the “work-life balance”.  Their observation of life watching their parents work all the time, didn’t really make sense to them. Consequently, they want to create more of a balance in life.    

Generation X’s, by and large, doesn’t equate material comfort directly with work. Their “balance” is oriented towards separating work and life. Unlike most Boomers, who live to work, the X generation only works to live. Work isn’t their identity, it’s merely the thing that allows them to pay for what they really want and their living standard. 

Many Baby Boomers’ attitude was, “live to work”. Working a 50–60-hour week was part of their business. Based on data, the Xer’s don’t agree with that lifestyle and are not interested in having a business where the cost is many hours of work.  

Planning for the Boomers and Their Business  

Because there is a shrinking number of future purchasers, small business seller’s must take all the necessary steps to prepare their company for an ultimate sale. In most cases they will need help in preparing for the sale of their business.  

There are professionals who can recommend to you how to prepare for the sale or your business, and to help you create the key strategies to implement for a greater potential value.  

Past Problems  

Many of the strategies needed to create value in business need time. You normally can’t wake up one day and decide to sell your business next week and expect to get the highest potential value.  

However, with the right coaching, you can start working on the strategies that can increase the potential value of your company. Even if you are years away from thinking about selling your business, business owners should engage with professionals to start the process of implementing the right value drivers early, with the end game being to increase the potential greatest value of their company.  

Point to be made  

By kicking the “transition of your business can”, down the road, owners are putting themselves in a terrible position. Not only are they not prepared to sell, they don’t have the systems in place that create the potential highest value, but also there may be a limited number of buyers in  the younger generations.  

If you are a business owner interested in discussing the future of your business, we would be happy to have that discussion with you.  

To aid you with the conversation, we have created an assessment tool that it easy to use. It takes about two minutes to complete, and it will give you an idea of your strong and weak points in your business planning. It’s a free tool called the “scorecard”.  Once completed we will send you a free analysis report of your strong and weak points of your business planning. We will also offer a free phone conference to discuss the results with you. Once you submit your scorecard, we will send you an assessment report in approximately 72 hours (about 3 days).  

Receive my free E-book;  “Unlocking Your Business DNA” to learn the strategies of growing, protecting, and transitioning your business for greater value” CLICK HERE 

Business Owners Essential Planning Tools! Part 2!

Good planning can often begin with owners transferring ownership interest to family members, without giving up control of the business. This type of planning sets the stage for the future passing of the baton and can be highly effective.

The long-term plan of business transition can also focus on who can run the business operations once the senior guard leaves the business. Just because a family member has worked in the business, it does not mean they can run the business effectively.

Business Transition And Succession Planning requires many years to develop the right plan. It starts with finding the right employees to train for the job, and the right people to run the business (this includes family succession situations).  

I have found that “Passive Ownership” can be a particularly good possibility for many business owners. They stay in control and slowly give away the duties over time while running the business, but at the same time slowly disengaging from the business. It gives them time to help prepare the junior successor for the job.

The procedure for “Transition Planning” is critical for a long-lasting understanding amongst the family members, both in and out of the business. Without clear communication to the family members, conflict and bad feelings may occur. 

Business Succession Planning  (Click to receive full report and guide; R-1)

  • What would happen to the business if one of the partners died? 
    • Who will buy your interest in the business?
    • Will the company, shareholders, or the heirs keep the right to own the shares. Are the party’s mandated to buy your shares? 
    • Where will the capital to buy the shares come from? 
    • Do you want the deceased shareholders/beneficiaries to have the choice to run the business? 
    • What is the funding mechanism to buy the business? 
    • How is the life insurance structured to help fund the purchase price?
    • Is the same true for a disability? If so, what is the definition of a disability to trigger the sale. Is the disability funded?
    • What are the rules if a partner wants to sell to a 3rd party? 
    • Is there a “put” right; to have the company buy the shares of a disputed share holder? 
    • What are doing concerning incentives to key employees?
    • How are you supporting retirement through the company? 
    • What are you providing in executive compensation to the key people active owners, and officers of the business?

There are many more questions that need to be answered. The elements of your business succession plan will normally be in your business succession agreement and incorporated in the operating or stockholder’s agreement.

CLICK TO Request our Full White Paper and Business Guide Free request (R-1)

Operating Agreement:  

An agreement which regulates the company and manages the relationships between the members of the company.

Buy-Sell Agreement

An agreement between the business owners to buy and sell interest in the business at a specified price upon a “triggering event”, such as death, disability, divorce, voluntary withdrawal, non-voluntary withdrawal, bankruptcy, and retirement.

This document is important and serves to obtain a fair price for the stockholder and a path for a smooth transition for the parties involved.

Type of Buy and Sell agreements:

  • Cross purchase: This is between stockholders to buy departing stockholder’s shares
  • Redemption agreement:  The entity (business) buys the shares
  • Hybrid/ a combination of above: A “wait and see buy and sell[1]

Provisions in the buy and sell agreement

The sale price of the departing owners’ interest and how it will be paid

  • Installment
  • Sinking fund
  • Cash 
  • Life insurance[2]

Other Methods To Transfer Property:

Although the buy and sell agreement is an effective method to transfer property, other methods, such as ESOPs, compensation plans, and pension plans have a place in funding.

There are other areas and issues in your business planning that need to be addressed at some point and redefined over time.

The valuation of your company should be done by a qualified and certified appraiser. Business owners seem to think they know the value of their business, however, in more cases than not, they are incorrect.

Having A Team Of Financial Experts Will Help You Plan Your Business And Your Estate.

My suggestion is to create a team of advisors who can meet periodically and report on the status of the business to the “team”.

I have found this to be a valuable tool as everyone gets on the same page in the planning process and understands what the owner wishes to accomplish. 

Over the years I have created the team consisting of the CPA, attorney, banker, investment, insurance and other professionals who come together and review what the status of the planning is up to that point for the business owner. Normally, the team consists of the professionals who have a relationship with the business owner and are currently doing planning for them. Unfortunately, each professional has their own agenda, and rarely knows what the other professional are doing for the business owner.,

In most cases this is the first time the advisors have communicated with each other. I have always thought this was in the best interest of the business owner and was prudent to use these resources. Putting the business owners’ advisors in the same room once a year could be the best planning strategy, they can employ. 

The Bottom-Line Thought

The solutions and strategies are in abundance to solve the issues. The problem is defining what the owner wants in their plan.

CLICK TO Request our Full White Paper and Business Guide Free (CODE R-1)


[1] A combination of the redemption and the cross purchase. Usually, the stockholder or trust owns the life insurance on the partners.  Normally driven by tax issues and positioning.   

[2] Life insurance is normally the least expensive way of funding the death benefit when compared to alternatives. The life insurance can also play a role in providing funds to help stockholders purchase interest in the company. 

Ode To Mr. Business Owner!

Dear Business Owner,  

We’ve never met, but I know some things about you.   

I know because I have met and served many business owners like you in my 50 years.   

Here’s what I know about you:  

You have a successful business, but it comes with a significant investment of your time, time that you want to start taking back for outside interests.   

You pay the IRS a large amount every year.  

You wear all the hats; therefore, you are the value of your business.  You know that it would be worthless without you.   

You desire time to mentor someone, or better yet, a group of people to run your business so you don’t burnout. Your problem is, there is no time to do this because you are so busy.   

You feel trapped within the four walls of your business.  

You dread having the quarterly conversations with all of the people that you pay to do the work for you.  Accountants, Bookkeeper, Financial Advisors, Attorneys etc. In fact, these “professionals” probably have never met.   

If you died tomorrow no one would have a clue what to do.   

You have no escape plan.  

You think there is no other way.   

Hi, I am Tom Perrone and I want to virtually shake your hand, give you a pat on the back, and tell you “I Get It”.   

You, like many business owners that I have worked with over the last 50 years think that there is no other way than the same old song and dance that has always been done.   

No one listens to you, the one that makes all the plates spin and it upsets you.   

You are up at night pacing the floors wondering how this machine that you created has overtaken your life.   

That wasn’t your goal when you started, in fact, you have no idea how you got here.  

You need an escape plan.   

Like I said, “I get it”. 

I’ve put together a team to help business owners like you enjoy more time doing what you love outside the business while the machine runs itself.   

I’m passionate about teaching intelligent business owners like you how to get all you can out of your business before it takes all it can from you.   

You run your business…Your business shouldn’t run you.  

As a way of saying thanks for taking the time to read this,    

I’ve included a copy of my book:  

Unlocking Your Business’ DNA”- Cracking the code to a better business, bigger profits and more time on the beach!  

Click reply and let’s learn more about each other.  

Your escape plan awaits…  

Talk soon,   

Tom.   

Business Owners Essential Part 1 Of 2

Introduction 

As professional planners, one of the most important services we can do for business owners, is to communicate to them the importance of the planning of their personal and business   assets in a coordinated effort.   My experienced is that business owners are so focused on running their businesses, they tend to neglect many parts of their personal financial objectives.     When you break it down, they have the same financial problems as individuals with the additional and complex areas of business transition and succession.    The purpose of this white paper is to discuss the various elements of their financial planning and highlight some of the critical areas.  “Key Essentials Elements” are financial areas which cannot be neglected. If the key essentials are neglected, owners are destined to financial failure, no matter how hard they work in their business, they will have a financial failure, with few exceptions.   

Many laws come out of Washington, which are relentless and never ending. There is no mercy for the taxpayer as the game keeps changing from one administration to another. Most tax policies change over time as new administrations are voted in. Consequently, taxpayers are always planning to maneuver around the tax changes to help avoid a financial disaster.  

A perfect example is the current estate and gift tax exemption which will sunset in 2025.   This will require more extensive planning, even though taxpayers have updated their estates and paid huge fees, when the exemptions were changed some years ago.  The reality is laws change all the time and taxpayers can either change with them or do nothing and face the consequences, leading to financial conundrum.     

A well-designed estate plan will consist of both the estate and business planning.   The business plan would not only consider business growth and distribution, but also, the ultimate transition and succession of the business, due to an event such as your death, disability, or retirement. 

Basic Planning documents:   

Power of Attorney, Health Care Proxy, Disposition of Remains Appointment (DORA), and Will. 

The use of a Revocable Living Trust (RLT) can be used, as opposed to a Will, for estate disposition. The RLT is a valuable tool. Assets are transferred into the trust and titled in the name of the trust.  The Grantor creates the trust, and is normally a co-trustee, keeping asset control.   The trust creates successive trustees to manage the assets in the event of your incapacity.  

A Limited Liability Company is an additional tool which may be used, in the context of your business.  

Advanced Directives Business Powers of Attorney:  

These documents deal with the unexpected disability, illness, or incapacity. It only makes sense that you should have these documents in place since the odds are great that you could have a long-term disability before age 65, and the odds only increase after that age.  

Request our Full White Paper and Business Guide Free 

Power of attorney (POA):  

This document names an agent(s) to manage financial affairs if one becomes incapacitated. Fiduciaries act on your behalf. They are called an “Attorney in-Fact”, and they manage financial decisions and transact business on your behalf. It is possible to have two separate power of attorney documents. One for your business, and one for your personal property. You can also appoint different people for each POA document. This makes sense because your personal representative may not have the business sense and experience to deal with some of the tasks needed when dealing with your busines affairs.  

The POA can be effective all the time or can be effective only under certain situations. This is called a “Springing Power of Attorney”.  An example of this is when the POA only springs into effectiveness when a doctor signs off on your incapacity to deal with your affairs. The person in that role should be aware of this.  

The purpose of the POA is to avoid costly and complicated court appointed guardians which is the procedure when there is no POA, and when someone is considered incapacitated. Since it is in place when executed, there is no delay upon the incapacity of an individual.  

Health care Proxy (HCP)/ also referred to Living Will.  

This appoints someone to make health care decisions if you are unable to do so yourself. Disposition of Remains Appointment (DORA): Provides a way to appoint, in writing, someone who shall control one’s final arrangements.  

WILL:  

The Will is to provide instructions on how your assets are to be distributed amongst your beneficiaries. A Will does the following:  

  • Outlines your distribution wishes- specific gifts of tangible personal property 
  • How your business is to be continued or distributed 
  • Names executive(trix) or personal representative responsible for probate accounting and filing, tax liabilities and the payment of them, and the disposition of the balance of your assets 
  • Appoints guardianships 
  • Establishes trusts to protect assets 

The Will specifies instructions regarding your intentions of the business; sold, liquidated, continue.   If your intention is to continue the business, your Will has instructions to do so. It would refer to any operating or buy-sell agreement if they exist.  

Through your Will you can establish a Testamentary Trust that will direct that your assets are managed and distributed based on your specific wishes. Assets can be managed for family members and distributed at the times you specify.  

For example, if you wanted certain property to go to certain members of your family, you can direct that. You can also preserve the principal of your assets for your children should your spouse remarry.  

Revocable Living Trust (RLT) 

A RLT can control your assets during your life and after your death. Once a RLT is set up you would transfer the title of your assets (stocks, bonds, real estate, life insurance, etc.) to the trust. You would then become of the trustee of the trust. This gives you complete control of the trust assets, and the trust. The RLT is not irrevocable until your death. You can change it anytime or collapse it if you wish. Property is not tied up in the trust, as you can change the title back to yourself in the future.  

At your death, there are no assets in your name, so, no probate. The successor trustee will gain control of your assets to distribute them according to your exact instructions. At your death assets will go directly to your heirs. No probate, so, lower estate administration costs, and no court delay in distributing your assets to your heirs.  

Along with the issue of distribution, the trustee will ensure continuity of assets management during a period of incapacity.  

Limited Liability Company.  

There are several advantages to using an LLC in the context of estate planning. 

  • Enables you to preserve significant control and management while reducing your estate costs 
  • Ability to transfer assets to family members, tax efficiently 
  • Can create significant valuation discounts using limited liability interests 
  • More income tax savings compared to estates and the double taxation of a C corporation 
  • No limit of number of shareholders   
  • No limit on the types of entities the interest of the LLC can hold 

Business Succession Planning  

The challenge of a business transition upon the death, disability, or retirement of the owner(s), is will the business survive?  This requires long term constant planning. Admittedly, transition planning is one of the of the most complex challenges in business and estate planning.  

Objectives:  

  1. Income for business owner’s retirement 
  1. Maximum but fair price for share of business 
  1. Smooth Transition 
  1. Could include compensation for family members in and out of the business  

Major Challenges 

  • Retirement for owners/income 
  • Reduction and payment of estate/State taxes 
  • Creating liquidity for the transition and new ownership 
  • Creating a formal business succession plan 
  • Family ownership and non-family ownership needs, communicated 

To be continued in Part 2 

Request our Full White Paper and Business Guide Free 

The Need for Effective Buy-Sell Agreement! Perspective On Value

Covering the Bases: 

I recently received a great article by my friend Ed Pratesi, AXA,CM&AA,ABV. Yes, Ed is very bright. So when he sends me an article he was involved with I make time to read it. I think this article is extremely clear and helps business owners and advisors have a clearer vision of what goes into the Buy And Sell Arrangement.

So, needless to say, I am proud to make this available to you. Enjoy!

Abstract: Every business with more than one owner needs a buy-sell agreement to handle voluntary and involuntary ownership transfers. This article explains why it’s important to update the agreement regularly and address all the valuation issues that may arise. 

This is a very good article concerning the need for an effective Buy-Sell Agreement.   

I would like to thank Ed Pratesi for contributing this fine article.  

CLICK TO DOWNLOAD THE ARTICLE 

Life Insurance USES For Business Owners! The Uses of Permanent and Term Life Insurance!

In my very long career as a professional advisor and insurance agent, there were many occasions when I worked with CPA’s, and attorneys that were misinformed about the type of life insurance that would be appropriate in certain situations in a business arrangement.  

Many times, I found that the advisors were basing their opinions more on their personal feelings rather than the actual case fact pattern.  In most cases, when I explained to them the long-term nature of the need, or even the short-term nature, they had a better understanding of the situation, excepting my suggestion of the type of coverage to be used.    

I do believe in term insurance and that it has a place. I have used it over the years in situations where we felt the insurance benefit was only needed for an ascertainable period.   An example would be to fund a liability in a company where the company is new and does not have the cash flow to pay the larger permanent coverage.   

Another area would be when the need is temporary, such as a short-term bank loan, or an outstanding company loan.     

I have experienced clients purchasing term insurance because the premiums were very low, at least for that time frame.  I have had clients tell me they would buy term and invest the difference.  They don’t invest the difference.  They wake up one morning only to realize the term insurance started to increase in premium at an unsustainable rate to pay, and the client still needs the coverage.  Oh, yea, they didn’t invest the difference. Trust me on this, they never do.   

As a side: Term insurance was designed not to be in force when the insured dies. Insurance companies make a lot of money on term insurance because they know the policy will not be in force when the insured dies (based on their mortality data).   

Term insurance was designed to do one thing. Cover the capital liability for the period which the liability will exist.  

Now that that is out of the way, let me review some areas where permanent insurance works, and in many cases works better than any other financial vehicle.   

Business Succession:   

Many times, when I review the Business Succession Document, I find that the life insurance does not correspond to what the agreement says. Either the life insurance is underfunded, lapsed, or will be terminating soon, as it was term insurance.   

In this case permanent life insurance would have been the best solution as it has double duty dollars.  It would fund the death of an owner, help fund the retirement of an owner, or help should the owner become ill, help with income when needed.   Until the business owner transitions his position; the insurance would be needed.  This could be for many years. 

Example:  Sole Proprietor 

Many sole proprietors will tell you they don’t have a market for their business.  In essence they have a job, not a business.  However, through insurance planning, they could create a market.  For the cost of 1-3% of what the business owner feels their business is worth, there is a ready market.  At the owner’s death, the life insurance company (for 1-3% of capital), will step in and pay the family the value of the business, with tax-free dollars.   

The family also can sell the business assets without a fire sale.  Even if they sell it for pennies on the dollar, they made out better than without having the life insurance.  In this way, the business owner can keep the family in the lifestyle they have become accustomed too.  

If set up correctly, the sole proprietor could have paid the premiums through the business check book. Depending on the business structure, the premiums would be taxable to the owner, however, the cash flow comes from the business.  If the sole owner was a C Corp, they could have used split dollar and paid the taxes on the economic benefit, or the taxes on the loan regime. Either way it would have been a less expensive way of providing the market value for the company, while making sure the family received the business value, tax-free.   

This is an example of where permanent coverage is the best.  The owner of the business can also have a plan that will pay them a retirement income from the policy, while they are trying to sell the business.  An example of double duty dollars.    

The life insurance also has triple duty dollars as it can be used to help fund the costs of estate taxes, probate and settlement costs at the business owner’s death.  

PROFIT  PROTECTION 

 Most profitable organizations have key persons and key groups.  They are the people who if they didn’t come to work tomorrow, would have a negative effect on the earnings of the company.   

Once you define them, insuring them will protect your profit center.  Not only will you protect you earning and profits, but the insurance would also create new tax-free dollars at a key person’s death.  

The benefit will help the owner:  

  •  Find a replacement for your key person 
  • Fund the “usually the first one doesn’t work cost”, search for the key position and person 
  • Absorb the period where no profits are being generated by the new key person(s), for the period of the learning and adjustment period 
  • Create benefit where you can lower or eliminate turnover with your key person group 

There are “double duty dollars” using permanent life insurance.  Not only are you protecting your profits from a loss, and the cost of capital to replace, but you can also use the life insurance as an executive benefit to keep the key person from leaving the company.  The cash values of the policy can create a very rich tax-effective retirement benefit on top of the normal retirement plan.   

You can create a benefit with vesting schedules and restrictions which give the owner control over the cash values and create a benefit where you are rewarding the key person(s) with a very high retirement benefit if they stay.  This type of benefit is very effective in lowering turnover of your key people.  A salary, bonus is forgotten and expected, however, a special key person benefit is substantial and hard to walk away from.   

This again is another area where permanent life insurance works, and where term does not. 

Golden Handcuffs 

In many small companies there are key groups that are the major reason for the profits.   They know the company, know how things work, and in many cases act like an owner of the company.  They are the group that create the profits, allow the owner to live a nice lifestyle and allow the owner to come and go as they wish.   

These are the people you want to keep for life!  However, they are well known. The competition knows them very well.  Not surprisingly, the competition makes it a point to meet them when they can, such as at trade shows, industry meeting, and gatherings, hoping to test the waters to see if they can sway them away with some type of financial offer.   

They are that good, and if your competition could sweep them away from you, the owners world would change overnight.   

 THE GOLDEND HANDCUFFS  

To keep this key person or group, you need to create something they can’t afford to walk away from. A benefit so good, that even your competition would find it hard to offer to them. This is all possible by using the proper permanent life insurance policy, and the combination of well-established tax law.   

Over the years I have done many comparisons using mutual funds, annuities, stock, and company earnings, but nothing compares to the combination of a permanent life insurance policy and the tax law which allow this type of benefit.   

Using “Golden Handcuff” programs allow you to write the rules, have a vesting schedule, recover your costs, take tax deductions, and other design flexibilities.    

 By using the leverage of the tax code, and life insurance tax code, you can create a non-walkaway benefit for your profit center.   

Example:  We just finished a plan, where the key person will walk away with a substantial income at retirement.  The employee’s cost was less than $266 a year.  The employee received a large deduction and had complete control of the funds until the employee retired.  The employee would have to make over 40% ROI on his contribution to the plan in order to receive the benefits he will be receiving.   

Not only will the employee have a great retirement benefit, if he died prior to retirement, his family would have received $74,500 tax free for the next 10 years.   

As you can see, there are some very good uses of permanent life insurance, and in many cases the best and most economical solution.   

A Tax-deductible Life Insurance Plan 

One area that many small business owners are not aware of is section 412(I), where owners can design having a life insurance policy with 100% tax deductible premiums.  Normally, this is a plan that works very well with small companies and a few employees.  Again, another area where permanent life insurance works the best.  

Finally, A Way To Work On Your Business Without Giving Up Working In Your Business!

Give Me Two Hours A Month, And Your Problems Are Solved!

In my book, “Unlocking Your Business DNA”[1], I discuss a system called, “The One Page Blueprint Solution”, or “OPBS”.    This system is designed to help business owners solve specific problems in their business, effectively, efficiently and without giving up time to work in their business.  It is a way to finally have business owners “work on their businesses” and solve business issues important for the success of their business.    

The OPBS does many things, among them:

  1. Prepares the owner for the planning session in advance.
  2. Organizes what needs to be discussed.
  3. The business owners control the agenda discussed. 
  4. Covers the elements which need focus. 
  5. Allows owners to work at their own pace.
  6. Creates brevity in your planning, leaving more time to work in your business. 
  7. Planning time is 1-3 hours a month which 60% of the time involves a self-study review. 
  8. Issues get resolved very quickly.  
  9. Many other benefits…

I use 15-20 key areas that I feel most business owners need to address if they wish to maximize their business growth and create the highest potential value for their business.  Here are two of 15 as examples of what is needed in the planning. 

This is an example of two of the many areas of planning.  I work with about 15-20 areas.  Not every company needs to fix all the areas, however, over time without reviews, areas of planning which were up to date at one time, can lose their effectiveness when not fine-tuned.

The Sale of Your Business to The Outside: 

  1. This could be in two months or thirty years; it is different for each business. In this planning session there are several areas the business owner needs to focus on. 
    1. Systemized business
    1. Put business in growth mode
    1. Delegate to middle management and upper management
    1. Lock the key group into the company
    1. Attract several potential buyers 
    1. Receive maximum cash for the sale
    1. Prepare to leave when you want to leave (maybe stay only if you want to stay)
    1. Plan to do something the rest of your life
    1. If you start early, you can control the whole process
  2. Tools needed: 
    1. Value Drivers
    1. Systemizing the business
    1. Golden Handcuffs for management and stay documents, (disclosure, competition, non-compete)
    1. Controlled Auction for the sale
  • #Sale of your Business from Inside the business or to your family! 
  • Make sure the new owners can run the company without you 
  • Lock in non-owners’ managers
  • Delegate your responsibilities to management
  • Due diligence to make sure you don’t end up with the business after the sale
  • Put business in growth mode
  • Guarantee income stream from the sale
  • Minimize taxes to you
  • Minimize taxes to the seller
  • Have a lifetime plan
  • Teach employee to be employers

Tools needed:

  1. Market Value Drivers 
  2. Systemizing the business
  3. Golden handcuffs for management team 
  4. Well Designed transition Plan

With the help of “zoom”, phone conferences, and the cloud, we can discuss an array of topics without parties leaving their offices.  Our designed meetings are previewed before our discussions so questions can be prepared about the subject matter.  (This creates a great give and take of the subject) 

It is my opinion that business owners should review all the key areas of their business periodically to make sure they stay “a fine-tuned machine” and maximize their future potential value of growth.  

If you wish to participate in a one-minute business assessment, to see how ‘fined tuned” you are; 

 LESS THAN A MINUTE SURVEY

Trust me: (it takes one- minute to do).  I will send you a FREE report card and summary of where you may want to focus for your business efficiency.  ALSO, along with the completion of the survey, I will send you a copy of my newly published book: Unlocking Your Business DNA”.


[1] You can purchase this book at Amazon-kindle and paperback. Profits go to “Wounded Warrior Foundation”