Estate Planning Chaos for the Business Owners

Why do some Business Owners have higher costs than others when…


–      They settle their estates…
–      They retire…
–      They transfer their business….
Let’s call the above items, “triggers” 
Over the years I have had the experience of seeing the end results of the estate settlement process for many business ownersIn many cases the results were not pretty because of the excess settlement costs. From my own experiences and case studies with associates, I have come to the realization that some business owners have higher estate transfer costs than other business owners. The interesting thing is the excess costs can be controlled by the estate owner. 

Business owners usually have more value in their estates because of business values and settling the estate can be usually more complex. But as mentioned, in my opinion, there are controllable aspects of the costs and ways to mitigate these costs.


Estate transfers Cost: Three major reasons for higher costs!

 No planning: This includes not having any plan, or not updating any earlier planningTheir estates are complex, and they need more than surface planning when their situation calls for more complex planning to carry out their goalsThis takes more time and moneyWithout it they pay a price in estate settlement because they designed the wrong plan or have no plan at all. 

No time: In many cases, there isn’t any time to make changesIt is too lateAll the changes should have been made in advance. Therefore, working on their business and estates yearly is a major benefit as opposed to waiting until it’s “too late”. 

Owners don’t spend enough time asking the “what if’s” of their situations. Every year many changes come out of Washington that affect business and estate planningBeing unaware of these changes makes them vulnerable to excessive estate settlement costsIn many cases the business owner loses by default. 

No liquidity: Settling the estate takes moneyIn many cases, most of the wealth is in the business and other personal hard assets which are difficult to turn into cash within a o  brief period.

§  Even if they could be liquidated, they either run the risk of losing value, or causing major tax issuesConsequently, the estate is open until the taxes are paid and dissolution of assets is completed, causing major costs. Wealth gets stuck in business and its value is at the mercy of the market and other economic factors. 

§  To prevent the lack of liquidity, we suggest that business owners use the business cash flow to create executive compensation plans with tax-free death benefits, and tax-free withdrawals. By doing this they create liquidityWhen an estate owner dies, there is a guarantee that a tax-free death benefit will create the liquidity neededFunded by the company cash flow

Succession of the Business

No planning within the business for successor management. No building of a key group or key person to learn the business as an owner. Consequently , when the time for transition is near, there aren’t many optionsThis affects the “most potential value” of the business. The time to start planning transition of the business is when you start your business or buy a business! The key group is also the group that starts to define the culture of the business, making it easier to attract talented employees. 

 No systematizing of the business- the owner has not taken the time to prepare systemsEverything is in their heads, literallyThere are no written down notes, no manuals or guides to pass on the instructions to others“In simpler terms, the boss must be around for things to get done.”   This limits the future ability to sell the businessPurchasers are looking to buy a business that has growth potentialNor do purchasers in most cases want to invest in a company that has to restructure its operations. A purchaser is not likely to invest in a company where systems are not in place, and which are not transferable. 

  No development of “value drivers” to create growth and culture. Consequently, there is no culture, systems, and no middle management to take on responsibilities or a group to transfer the business to as mentioned aboveThis is a major issue with companies. A true test is asking the business owner if they can take 30 or more days off a yearIf not, I tell them they have a job, but not a business. The owner of the business has not let go of the control they have of the business. It’s the business that controls the owner


Retirement Planning and Why the Wrong Type Causes Chaos!

 The wrong type of retirement plan- although qualified plans like 401k’s or profit-sharing plans are good for rank and file. They are not always the best retirement vehicle for high income business owners for a few reasonsQualified plans are riddled with rules that business owners don’t need in their life. Qualified plans are needed in the company to attract employees, so in many cases, they are a particularly good method of attracting employeesHowever, for the business owner, Executive Compensation plans are more usefulHere are why qualified plans can be a thorn in the side of the high earning business owner:   

  • No discretion as to who gets what amount in the plan-meaning the owner doesn’t get 100% of the distributed amount.
  • Who is to be in the plan- The owner can’t discriminate as to who should take part in the plan
  •  No use of money 59 1/2 without penalty- Business owners are always looking for cash to support their businesses. The inability to withdraw funds from their retirement account is problematic when funds are needed
  •   Age 72 RMD forcing high income owners to pay more taxes- business owners usually have other assets to rely on for incomeIt could be passive income from rents, income from the business and income from investments
  •   IRS in your life – Qualified plans need to file with IRSHowever, if business owners used executive compensation plans, this is something they could avoid. 

Many business owners can use executive compensation programs to develop wealth outside of their businesses and get great tax efficiency. For example, using a “Corporate Equity Executive Plan” will allow the owner of a company to use the company cash flow, pay 10% of the tax they would pay under a pension plan, and create a tax-free family bankThe family bank allows the owner to use the money, tax-free, any way they wishAlso, they are not forced to take the money out when they are retired. 

For more information about business planning, I am offering YOU A FREE copy of my eBook, “Unlocking Your Business DNA” FREE Business guide which will help you understand some of the planning concepts used in retirement planning, business succession and estate planningCLICK HERE for your free download. Your book will be downloaded automatically. 


If any problems with your download please email me; tperrone@necgginc.com

“The Story of Retirement for The Business Owner” 

It is quite common for an employer to think in terms of a qualified retirement program when they think of retirement.  The benefits of having a company plan would be tax-deductibility, tax deferred, an employee benefit to help attract employees, and a host of other reasons to have one.  Most companies should have a long-term retirement plan for their employees. Most accountants will normally jump on this idea because it is another tax deduction.  

However, what is rarely discussed are the benefits that the owner of the company receives from the qualified retirement plan!   In most cases, the qualified retirement Plan will not be the best choice for the owner of the company, for various reasons.   

Here are a few disadvantages for the high-income business owner:  

  1. No control of deposit amounts  
  1. Limited contributions 
  1. Government controlled IRS FILING 
  1. Administration costs- actuarial costs, filing, accounting 
  1. Employer is the fiduciary is having responsibility and accountability to the plan (what happens when the employee loses money in the market?) 
  1. After-tax cost and non-recovery of the net outlay for the company 
  1. The percentage of payout for the employer is usually a much smaller percentage compared to the employees when they retire, so the employer owner is being discriminated against  
  1. The withdrawal is 100% taxable on all the funds 
  1. Tax exposure and penalty for using the funds before 59 ½.      
  1. Forced distribution RMD 
  • For the employee, having a 401k and/or profit-sharing plan is a great deal.  They could have matched contribution’s ability also.  It is probably one of the best ways for people to save for their retirement.   
  • The business owner or highly paid executive has the problem of creating enough capital for retirement so it can produce enough income to narrow the gap between their final pay and retirement needs.  In most cases, because of the limits imposed on qualified plans and the taxability of the withdrawals, the qualified plan will not be the answer.   
  • High Earning Business Owners – it’s a different story! 
  • However, for the high earning employer, this is not a great deal compared to other executive compensation plans the employer could be. implemented for them.  There are several major pension destroyers for the employer when comparing retirement plans vs executive compensation plans.  
  • Disadvantages of a qualified retirement plan to the “high earning business owner”, compared to using a CEEP! 

  • Limited contribution amount 
  • 100% of withdrawal taxable at retirement – With a CEEP you control the contribution amount 
  • Pre 59 1/2 with penalty.  
  • Funds in a qualified contribution plan would be very hard to extract (hardship clauses) 
  • Bottom line, when the employer needs funds to build inventory, buy equipment, payroll, retirement funds are not a source, however, in a private executive compensation plan, they would be.  
  • With a CEEP you have access to funds without a penalty 
  • Death benefit; limited to accumulated fund, and taxable in a pension.  
  • With an executive compensation plan like the CEEP, the death benefits are tax-free and large 
  • CEEP would have a large tax-free death benefit to finish the retirement that wasn’t even started, and the benefit would be tax-free 
  • Deductible:   
  • Contribution plans are tax deductible as the contributions are made, consequently showing a charge to earnings in the year of contribution.   
  • CEEPs are balance sheet friendly as a receivable asset with interest.  
  • CEEPs can be cost recoverable for the company, while retirement contributions are not. The qualified pension contributions are normally tax-deductible when made, but not recoverable for the company.  
  • With a qualified plan, you are forced to take RMD (Required minimum distributions) 
  • With CEEP, you are not.  CEEPS distributions are tax-free. 

Table below: A qualified contributory plan doesn’t do the job when the owner of a company has an interest in growing wealth through their business.  As mentioned, the contribution must be shared with the other employees, and there are rules as to the maximum contribution which high earners can make.  In this case, the owner only could put the $30,000 in their account. With the CEEP Executive Compensation plan, the full $50,000 could be deposited into the account of the owner of the company! 

Plan Contribution Future Value 66 Gross 15 payout Taxes YRLY Net Income 
Qualified 30,000 893,351 80,348 24,104 56,244 
CEEP 50,000 1,863,708 165,099 165,099 

Many advisors including accountants, lawyers, and financial professionals are not aware of some of the great programs that can be designed using executive compensation.  The CEEP program (Corporate Executive Equity Plan) is a flexible design built around the tax code.   

Here is a chart comparing a Profit-Sharing Plan/401k and a specially designed CEEP Executive Compensation Plan.  

ITEM PROFIT SHARING 401K CEEP 
Tax deductible Yes Yes, optional 
Tax deferred growth Yes Yes 
Government Controlled Yes No 
Selective as to Participants No Yes 
Pre 59 1/2 availability  No Yes 
Tax Free withdrawal No Yes 
Death Benefit Only current accumulated value of account, taxable Immediate substantial tax-free benefit 
Required Minimum Distribution Yes  No 

Bottom line:   

Contributory plans like 401k’s, SEPS, simple plans and IRA are wonderful plans for employees to save money for their retirement.  However, given the above list of restrictions for employers, they are not effective for high income business owners in my opinion.   

Note:   I used 30% marginal bracket. Over a 15-year payout, the pension would have a $361,560 tax liability, while the CEEP was tax free.

To learn more about The Small Business Super Retirement Plan Just for Business Owners and High Earning Executives, request our free White Paper. CLICK HERE! 

Someday You Will Leave Your Business By Retirement, Death, Disability Or Drop Dead At Your Desk! Do You Have A Method Of Taking Your Business Equity With You In A Tax Efficient Way?

There are millions of small businesses in the United States, and many of them have something in common, and that is that they do not have a succession plan.  

I have heard figures like 80% or higher do not have a succession plan. Over 50% of the companies that have a succession plan, have either outdated plans, or incomplete plans.  

Why is this an over whelming problem with small business owners? Why would a business owner not want to make sure their “lifetime of effort” isn’t lost because of a lack of planning? 

SCENARIO: Someday all business owners will leave their business, either by retirement, death, disability, or just drop dead at their desks.  

 There will be a great loss in the value of the company because of this lack of planning, and consequently, the owner or the family will not receive the true potential value of the business. 

While I cannot explain why business owners do not do their planning, I can tell you some of the reasons the business owners and their family will not get the true value of their company when one of the three triggers occurs (retirement, death, and disability) They would be: 

Lack of planning -. They do not implement systems such as value drivers’ systems, next middle management, systematizing procedures, and others business building procedures. These are the elements that create the future value which a purchaser looks for when buying a business. 

The lack of planning also includes the failure to develop a middle management which could take over most of the tasks of the owner. By not creating a middle management, it leaves the owner as the indispensable person, the essential person in the firm. This is a dangerous position for the future of the company. It may be the greatest threat to the future value of the business.  Like anything else, when you lose the essential indispensable part of a machine, the machine will not work.  This is the same for the company when the owner is the “essential and indispensable” employee.  

Time- Most systems need time to develop and cultivate when building a business. Processes and systems need years to mature and create the potential value of the company. Consequently, when the owner gets near retirement with no more road left to plan, it is too late. Selling the business at the most potential value is not attainable. 

No liquidity: Many business owners put too much of their wealth in the business, such as inventory, machinery, receivables, and benefits, to name a few. They do not make the adjustment to using business cash flow to create wealth outside of the business, like pension plans, executive compensation plans, and other value building programs. Consequently, when capital is needed, it is hard to raise it, and is not readily available to the owner when needed the most.  

When business owners, decide they want to retire, and leave their business, they find themselves in a conflicted position. Because they did not take the time to plan, they have run out of time, and they will not yield the value they would have normally received if they had done planning over the years.  

The only options they may have:  

  • Sell at a reduced price 
  • Stay in the business until they find a buyer willing to buy at this price 
  • Continue in the business to fund their “retirement years” 

The bottom line is to start your planning early. My suggestion would be on the day you buy or start your business, start implementing a transition plan, as most of the transition planning requires an extended period in order to implement.  

Get your free Business Transition Commonly Asked Questions Report! Click here! 

The Costly KNEE JERK FINANCIAL SUGGESTION!

Over the years, I have been asked by business owners how they can use their company to create more tax deductions and to build retirement funds for themselvesWhen you put tax deductions and retirement funds in the same sentence, it suggests the vanilla response, of a pension plan of some type or a contributory retirement plan, like a profit-sharing plan, or a 401k. 

However, is that what a business owner is really askingOr, do they mean, they would like to build retirement funds through the business and assume they can get tax deductionsOr do both elements co-exist in the plan that they are thinking of? I think most advisors would suggest a 401k plan, a cash balance plan, a simple plan, or a profit-sharing plan for example. 


 This is what I call the costly, KNEE JERK REACTION. When asked by a business owner, about retirement plans, I have learned to slow it down and ask the business owner to clarify exactly what they are trying to accomplish, rather than rattle off a KNEE JERK response, such as a “profit sharing plan, or 401k plan”

Questions like:  

–      Do you want to include everyone in the plan? 

–      Do you only want to favor yourself and family? 

–      Are you trying to give a benefit to a specific employee?

Do you want all the contributions to end up in your account, or are you willing to share with other employees? If so, how many and who?

If the employer/employee is trying to stockpile contributions to their account, they will have limitations with money purchase plans (limitations on contributions for 2022 of $58,000.) This makes it hard to deposit substantial amounts of money into the employer’s individual account, since they must include everyone

Based on the response, this will determine how I design the planIf he wants to spread the dollar among the group, you are talking about a qualified retirement planOn the other hand, if they want limitations as to who can be involved, they are speaking about a non-qualified executive compensation plan

In this model, I compared two scenarios so my client would have an idea of the difference in absolute dollarsI based the model on conservative values and returns, staying consistent with both types of plansI am comparing a CEEP to a Hypothetical Pension plan (money purchase plan). [i]

As you can see in the chart below, based on the same parameters for each plan, the CEEP program created much more retirement benefits for the owner than a qualified retirement plan

The owner participant received a much higher payout (tax-free), than the pension plan. In addition, if the owner died, from day one, the CEEP plan would pay a substantial tax-free amount to the family, while the qualified plan would only pay what was in the account which would be taxable to the beneficiaryThe CEEP death benefit would be 100% tax free and would not be required to be withdrawn at death, or older ages like a pension or IRA plan would

Once you compare a CEEP to the Pension plan, you can then see why defining exactly what the owner wants to accomplish is important as both plans offer different benefits and different tax scenarios

KNEE JERK advice happens more than you thinkAnd when it does, it can cost your client a lot of money, NOT to mention your reputation as an advisor

In this case, the “Knee Jerk” suggestion to use a pension plan to solve the problem, shortchanged the business owner from having greater benefits for the future when compared to the suggested pension plan. 


[i] In this scenario, the owner could only put in $30,000 of contribution out of the $50,000.  Based on a five many company and different salary ranges. 

REQUEST our free Business Essentials Report.  This report is more than a report, it is a resource and guide to many planning ideas for business owners.  It is an immediate download CLICK TO RECEIVE

Rushing Through the Most Important Document in Your Business!

In my career I have experienced several business owners rushing through the implementation stages of designing their buy and sell agreement (BSA), probably one of the most important documents they will ever need, treating the process with little thought.   As Rodney Dangerfield would say, “No respect”.  When it was completed, it was very basic, doing more harm than good. 

In some cases, maybe more than I think, the document being used by the drafting attorney was a “hand me down” from another attorney.  While the “hand me down form” may have been useful in drafting another person’s situation and making it easier for the drafting attorney to do, it was not going to maximize my client’s planning situation.

In Paul Hood’s great book, “Buy And Sell Agreements, Last Will And Testament For Your Business”, he covers the consequences of not designing the right buy and sell agreement, and how important it is to spend the time and money preparing and designing this important document, with an experienced lawyer.  [i]

Paul specifically speaks about attorneys using a “hand me down agreement”, and how it may be more harmful by having it than not. 

The “Paul Hood Fire Drill”

He uses the idea of the “fire drill”. What happens when a “trigger happens? What will be the outcome and the consequences based on how your BSA is set up (or not set up), when you play it out. Like you were the leaving owner, and then again as the remaining owner.  On a personal note, the “fire drill” advocated by Paul is something I use all the time and has been instrumental helping my clients and their attorneys in drafting the proper strategies for their situations.  I have found that this has been a great way of helping my clients design the best BSA for themselves. It has allowed them to make it real and start developing questions and ideas that they can implement in their design. It keeps them involved with the process.

The “Fire Drill” strategy has put my clients in the “power seat” of knowledge, so when they discuss their BSA with their attorney, the elements and strategies that are being used are not foreign to them. This consequently helps them design a better BSA, reducing the time needed to spend with their attorney ($$$$$).    

Keep in mind, many business owners start the process of designing the BSA when there has been no experience of consequences with an owner or co-owner leaving the company. 

Everyone is Equal at the Start!

When owners design their BSA, they are all equal in status.  People that enter into agreements want the agreement to favor them when a triggering event happens, even if the agreement has not been updated in years or there is no reference to the triggering event. 

When are clients initially design their BSA, it probably will be one of the few times that all the partners will be negotiating with each other, because when there is a triggering event, chances are they will be negotiating with someone other than their co-owner.  

The representative of the departing co-owner will have a different perspective as to what they want out of the BSA!  Whether it is the spouse, their child, their law firm, whomever, they will be negotiating from a different point of interest.

Business relationships, and friendships are put aside.  It is at this point you would hope your BSA covers all the areas of concern that need to be covered.  The bottom line is the agreement must be exact as to what will specifically happen based on the triggering event.  There is no room for errors if the document is specific.  The best time to do this is when everyone is on equal ground. 

For this reason, owners designing their BSA with their attorney should take it very seriously because they are really pre-negotiating for the people, they love the most without any certainty of which trigger will occur and which side of the trigger they will be on, leaving or a remaining co-owner.

It is extremely important that the triggering events be identified and that you will understand what will occur with each trigger event.  

Paul Hood’s “fire drill” has made it easier for my clients to understand the importance of designing a solid BSA.  By posing questions to the scenario, the BSA becomes very real to them.  

Examples of how they would play out the “fire drill”  

·       What if you’re the first co-owner to leave?

·       What if you’re the last remaining original owner? 

·       What if you end up with a co-owner you don’t want to be owners with? 

·       What happens if one of your co-owners, dies, divorces, or goes bankrupt?  

      By implementing your “fire drill”, you will start to formulate different scenarios for your own situation creating your own buy and sell design.  

This is a critical document in keeping your business going should a trigger happen to any of the co-owners.  Unfortunately, you must deal with it in advance and before there is a triggering event. 

Risks when implementing your BSA:  

·       Using an attorney who is using a fill in the blank form.

·       Not planning the scenarios before designing the plan. 

·       Not having a BSA.

·       Not signing it. 

·       No dealing with how to fund such triggers.  

There are so many elements to the buy and sell agreement that need to be covered, the planning of this document can’t be taken lightly.  However, that is not to say you can’t have a great BSA.  Having experienced professionals to help guide you through the process will pay off great benefits in designing and implementing your BSA. 

We suggest you find competent counsel who has experience in designing the buy and sell agreements and discuss your goals and objectives with them. 

Again, my best advice is pick up Paul Hoods book (“Buy and Sell Agreements, last will and testament for your businesss”.) Read and study it. 

 If you would like our free Business Succession and Transition Planning Guide, click the link and we will send you a FREE WHITE PAPER to get you started. in your planning.   YOUR FREE GUIDE


[i] E. Paul Hood is a prolific technical author. He has published a number of books on planning and is one of the leaders in estate planning and business succession planning.  

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The Easy Process To Identify and To Solve The Problems!

The Easy Process To Identify and To Solve The Problems!

Excerpts from My book, “Unlocking Your Business DNA”

The One Page Solution!

As we start the process of fixing the problems, they need to be identified. In chapter 1, I discussed how the business owner needs to find their “Business DNA”. Again, this is about focus and asking the right questions, and giving the business owners the amount of time, they need to think it through.

I break down the issues into two categories, BUSINESS GROWTH AND TRANSITION.

Business Growth: Focuses on the business itself such as the strategies needed to grow the business, the systems, the culture, and its employees. It is all about the business future.

Transition: Focuses on the categories that relate to the owners, and the changes they need to make in their personal life because the business is growing.

I keep these categories separate because the issues concerning the business growth are different than the owners transition issues. However, as the business growth changes, it affects the transition of the owners, and vice versa.

It is very important that the business owner is committed to fixing their problems.  If they are not, the first time they have a business roadblock, they will tend to put planning on the back burner.  This is a mistake, because most of the time it does not resurface until there is a crisis.

However, in our planning we do create action plans in small steps. Having a team of advisors working together creates the ability to complete the small steps needed to accomplish our goals.

An Example:

A perfect example was when a company we were working with had plateaued in growth and wanted to create more business growth. When we went through some of the planning questions, I realized the owner had spent no time systemizing their business.

The owner had no documentation of operational systems of his business, but instead it was all in his head. He would delegate the tasks to his employees like a drill sergeant.  He never even thought of the fact that there was no continuity in his business, consequently, if something happened to him, the business would have ended.

I asked him, “could you go on vacation for three months and not check in during that time”?

He looked at me and laughed, replying, “are you kidding this place would fold in seven days.”

I replied, at least you are real, the sad part however is you do not have a business, you have a job. You have a position, a paycheck, and a place to go, but you do not have a business.

He looked at me dazed! But he knew I was right.

The Process Using “One Page Solutions”, will keep everyone on track.

To uncover the issues and problems with the business owner we go over the main subjects called “ONE PAGE SOLUTIONS.”  On any subject there are always a few directions in which the business owner can go. We discuss them and analyze what are the most important subjects the business owner needs to deal with currently. “THE ONE PAGE SOLUTIONS” ARE LISTED BELOW.

Each Subject has a few sub-topics we review with the owners. As we DISCUSS the One Page Solutions, we find the strategies which will solve the issues. Once we are done with the subject, we move on to the next One Page Solution, if any.

THE FOCUS AREAS of the “One Page Solution” ARE:

1-Sale of Business (outside)/ Evaluation Methods/Timing

2- Inside Transition (Family, Co-Owners, or Key Employee/s)

3-Passive Ownership- Owner wants to still run the business, but take long trips

4-Retirement; defining and preparing

5-Wealth Accumulation & Asset Protection (both in and out of the business)

6-Premature Death- Consequences

7- Estate Distribution- updating

8- Life Insurance Contracts and Benefits

9-Legacy Planning / Management of Legacy

10-Disability and Illness, Medicare, and Medicaid

11-Key Employee Retention- and Creating A Culture

12-Key Employee Owner’s Manual- systematically creating company manual, business coaching, marketing proceedures

13-Corporate Benefits and Retirement- cost and efficiency

14-Qualified Plans and Personal Liabilities- Executive Compensation

15-Family Relationships/Employee Relationships/Human Resource

We helped a business owner recently with the problem of not having business growth over a prolonged period of time.  The solution was to put in place strategies that would create transferable values for the future.

They included things like creating key group, documentation, standard procedure, diversification, and growth strategies.

In this case we realized this will take some time to implement. The owner was under no delusion that this will be done in one year. Most importantly the owner started the process. A few years from now he will see the outcomes in all its glory. Because we have experts in our toolbox, we shared our professional advisors with our client for coaching purposes, and education.

Besides implementing a few systems, they will also do a business appraisal every two years. Over a period, this will help them evaluate the growth of their company by implementing the systems suggested.

By doing this the company could allow for better planning in the future, and adjust the path towards financial security, and business growth.

One of the key elements to helping Business owners solve problems is to also identify the roadblocks. This eliminates the surprise factor should our implementation strategy not go as planned. In one of our planning agendas, we discuss these roadblocks and try to define the subsequent issues and challenges in the future.

What is extremely important in this process is that it makes the owner aware of any potential issues they must have to deal with in the future and stay ahead of the problem curve.

Over the years what has been extremely helpful has been the communication with the team. Again, these are the client’s advisors that may or may not have been in place before we started planning. Since we update the team regularly, we are often given new advice that has been helpful in forecasting future events in the business.

We normally would not have this knowledge if we did not have the team of advisors in communication. This is one of the biggest advantages of working with the team and having periodic reviews.

We have been successful helping business owners work on their business to get issues resolved and to focus on details. We use a One-Hour a month system for the business owner to do this.  This allows the business owner the brevity they want, but also, gives them quality time to organize the details of their business. Through our step-by-step system, we help business owner cover all the key issues that are needed to cover to run your business smoothly, take more time off, earn more money and just enjoy working and life much better.  

If you would like a FREE WHITE PAPER called “Your Business Essential” which will help you organize your business, CLICK THE LINK BELOW, download the white paper. This is a 128-page guide in business planning Your Free. When you click submit on the form, your file will immediately download.  Enjoy. 

Immediate Download  

You can purchase of “Unlocking Your Business DNA”, AT Amazon. All profits to to Wounded Warrior Foundation and other Veteran groups.

Consequences Of Not Creating A Buy and sell agreement!

Part 2 

BY Thomas J. Perrone, CLU, CIC 

S Corporations enjoy the advantages of limited liability, transferability of ownership and professional business operation and management. The S Corporation is taxed similarly to a partnership, as it is a pass through to the shareholders.  

The C Corporation is taxed at the Corporation level first. When the C Corporation is profitable and generates taxable profits. When profits are distributed to the individual shareholder it is taxed again when dividends are received by the shareholder.  

You will find S Corporations normally when the individual rates are lower than the Corporation rates. Also, losses in the S Corporation shareholders may benefit, by deduction, the losses on their individual tax returns.  

S Corporation requirement 

  • No more than 100 shareholders- members of family are considered one shareholder 
  • Must be a domestic corporation 
  • Only individuals, a decedent’s estate, estate of individuals in bankruptcy, and certain trusts are eligible shareholders of s Corporation 
  • No shareholder can be a nonresident alien 
  • One class of stock (different voting rights are allowed) 

Basis and S Corporation 

There is only one level of taxation in the S Corporation. That is at the shareholder’s level.  

If the shareholders basis exceeds the distribution, the shareholder usually will not be taxed when they receive the distribution.  

If the S Corporation has never filed as a C Corporation and has no retained earnings or profits, distributions received by an s Corporation shareholder are not subject to income tax if the distribution does not exceed the shareholder’s basis. Consequently, the larger the basis the greater amount of distribution can be taken tax-free.  

Quick overview of Basis 

  • nontaxable distributions of previously taxed income 
  • income distributed in the same year in which it was earned 
  • losses 
  • nondeductible expenditures such as life insurance expenses 

Keep in mind that the adjustments to shareholder basis is an ongoing procedure and will vary from their initial contribution to, or investment in, the Corporation. Usually, a service corporation will have a low basis because of the low initial investment made in these types of businesses.  

Life insurance to fund the Buy and Sell Agreement 

Life Insurance can have several advantages for S Corporations in a buy-sell agreement.  

A nondeductible expenditure such as life insurance premiums decreases a shareholders’ basis in an S Corporation. The cash value policy can help offset, eliminate, this adverse situation.  

Life insurance cash value helps offset the premium charged to the capital account. The cash value offsets the premium paid so that the decrease to the capital account is offset by the cash value of the policy.  

 As an example, if the premiums are $15,000 and the cash value increases by $12,000, then only $3,000 is charged to the capital account reducing the basis of the stockholder by $3,000. As opposed to having a term insurance policy with a premium of $4,000. The permanent coverage will have less effect on the basis reduction of the stockholder than the lower term insurance premium.  

Over a longer period, there will be in increase over the premium, consequently eliminating the basis reduction. In the term insurance scenario, the reduction of cost basis will continue. In some cases where the term must be renewed, or the term has an increasing premium, the lowering of the basis can be substantial.  

Death benefit and basis 

If the life insurance is set up as a redemption basis, it is possible to plan for an increase in basis for the remaining stockholders, by using a promissory note for the deceased stockholder before settling the life insurance claim. Since the death benefit is tax free income, it will increase the basis. Example:  there are three stockholders, A dies. Instead of making the claim on the life insurance, A is bought out using a short-term promissory note. Once completed, the death claim is filed, and proceeds will come in tax free for the remaining stockholders which will increase their basis. If the death benefit were used for the decedent, there would have been a wasting of the basis since the decedent’s estate would normally receive a stepped-up cost basis.  

Stock Redemption in S Corporation 

The buy and sell agreement are between the stockholders and the Corporation. The S Corporation owns the policy on the stockholders and is the beneficiary of the policy. Death proceeds to the Corporation are tax free and increase the basis of the stockholders. A big advantage to arranging the buy and sell agreement under an S Corporation is avoiding the alternative minimum taxes and the loss of basis found in a C Corporation.  

Cross Purchase buy and sell in s Corporation  

The arrangement all owners of a business agree upon in advance to purchase proportionate shares of the decedent shareholder’s interest. Each stockholder would own life insurance on the other stockholder(s) and be the beneficiary.  

  • Life insurance premium is a nondeductible personal expense 
  • Shareholders receive the death benefit federal income tax-free 
  • The surviving stockholder uses the funds to purchase the stock, which will increase the basis of their holdings, by the amount purchased.  

Some key issues:  

Section 318 Attribution Rules  

In a C Corporation, attributions can be avoided for tax purposes by arranging the buy and sell agreement under a Cross Purchase. Since the Corporation is not redeeming the stock, and it is the stockholder, attribution and the treatment of the redemption being treated like a dividend distribution is avoided.  

In an S Corporation, if the S Corporation does not have retained earnings or profits , it will have the same tax result as if the shares were sold or exchanged, allowing the shareholder to recover their basis tax-free, with any amounts exceeding. Basis being treated as capital gains.  

 A poorly structured buy-sell agreement could result in the loss of S Corporation status, as well as the possibility of increasing the surviving shareholder’s tax burden on future distributions from, or on, the sale of the S Corporation. However, there are some great advantages of setting up a proper buy-sell agreement which can be even greater advantages than those available to C Corporations.  

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Conclusion: 

The S corporation can be a great tool for many business owners as a corporate structure. A Buy and Sell Agreement must be carefully considered and drafted with consideration of avoiding the loss of an S Corporation Election.  

The Key To Creating Value in Your The Key To Creating Value in Your Company

In Chapter 4 of my book, “Unlocking Your Business DNA”, I discuss your key group. I discussed the up side  and the downside of having a key group. 

First, the upside is nothing but good stuff.  Having a key person or group is one of the value drivers which add great value to your business, add profits, frees up your time, and allows you to enjoy your business life more.  Also, they can become the future purchaser of your company. 

The key person or group only becomes bad when the owners don’t pay attention.  They don’t protect themselves from the possibility of being held hostage in the future.  The case study is worth reading as it happens all the time to unsuspecting owners.  

In the case discussed, I pointed out the problems, but also gave some possible solutions where everyone is happy.  

This is a key chapter to read to make sure you don’t make the mistake our client did.  

   If you wish to discuss creating a “Destiny Plan” with me, or discuss general questions about your business’ Key Business and Financial Elements, CLICK  BELOW to arrange a mutually convenient 15 minute discussion.       LET’S DISCUSS “DESTINY PLANNING”  ALSO, if you would like to email me your questions, please do;  tperrone@necgginc.comsubject:  QUESTION 

How The Buy-Sell Agreement Fits Within the Scope of An S Corporation!  

Part 1 

BY Thomas J. Perrone, CLU, CIC 

Normally, a business makes up a substantial portion of the owners’ net worth. Many business owners do not think about what will happen to their business in the event of their death or a life changing event (trigger).  

This article will focus on why a buy and sell is an important document, one of the most important you will need. 

We will also discuss the buy and sell agreement in the context of an S Corporation since S Corporations are extremely popular. 1 

Consequences of not creating a buy-sell Plan.  

  • Stress on the business’ cash flow or credit line having to purchase the decedents owner’s interest  
  • Unqualified and instability with employees running the company 
  • Disagreements and conflict among heirs increasing administration time and costs 
  • Lack of a market for business which may potentially represent a significant value in the estate 
  • Suppressed value much below fair market value to raise cash for estate needs 
  • Termination of the business 
  • Instability amount employees and creditors 
  • Lack of liquidity to pay estate taxes and other administration costs 
  • Stream of income to remaining family members from the business is lost 
  • Valuation disagreements and IRS litigation 
  • Nightmares of not having a Buy and Sell agreement in a S Corporation! Loss of eligibility as a S Corporation resulting in involuntary termination of the S. Corporation status 
  • Most transfers to entities such as partnership, Corporation and most trusts are prohibited transfers 
  • A termination of S Corporation status will cause the Corporation to be taxed as a C Corporation as of the day of termination creating income tax consequences to the shareholders.  
  • Corporation, which is terminated, must wait five years before making a new S Corporation election, resulting in Corporation being taxed on its net profits for five years.  
  • The surviving shareholder could face additional tax burdens on future ongoing Corporation distribution and on those made upon the sale of the Corporation 

Funding the buy and sell agreement is always a challenge to companies, because it comes down to four ways of funding a triggering event 

  1. Borrowing money from the bank 
  1. Using cash flow out of the business 
  1. Life insurance death benefit 
  1. Cash  

When you compare the costs of funding the buy and sell agreement, life insurance will be the least expensive by a long shot, in most cases, especially, based on a death trigger.  

Other triggers, like divorce, sudden removal from the firm, voluntary and non-voluntary removal from the firm, bankruptcy, and disability are triggers where there is not a death benefit being paid, but money is needed. In these cases, a promissory note may be used in conjunction with a term payout, or installment loan payout.  

However, the cash buildup of a life insurance policy could be used as a funding vehicle especially if the policy has been in force for many years.  

In Part 2 we will investigate how the buy and sell agreement fits within the scope of an S Corporation.  

FREE REPORT “Jones Business Planning and Succession Report” ASK FOR REPORT R3 

CLICK HERE