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?

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Income from your business, Selling Your Business, Strategies of growing business, Tax Efficient, Valuation, Value drivers

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 Over 50% of the companies that have a succession plan, have either outdated plans, or incomplete plans.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.

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The Costly KNEE JERK FINANCIAL SUGGESTION!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Passive Ownership, Tax Efficient, Tax Free Income, Uncategorized

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 themselves. When 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 asking? Or, do they mean, they would like to build retirement funds through the business and assume they can get tax deductions? Or 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 plan. If he wants to spread the dollar among the group, you are talking about a qualified retirement plan. On 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 dollars. I based the model on conservative values and returns, staying consistent with both types of plans . I 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 beneficiary. The 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 think! And 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.

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Rushing Through the Most Important Document in Your Business!

Featured by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Life Insurance Types, Selling Your Business, Uncategorized, Valuation

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.

You As A Business Owner Have the Best Bank In Town!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Executive Benefits, Income from your business, Life Insurance Types, retirement, Tax Efficient, Tax Free Income

WHO WANTS TO BUILD MORE WEALTH THROUGH THEIR BUSINESS?

Did you know as a small business owner, have access to the best possible loan arrangements to create future wealth. This little know secret in the tax code, which has been used by large companies and savvy financial professionals for decades, allows you to use your company cash flow to create tax-free wealth, at a nominal tax cost.

Take 10 minutes to see how $55,000 creates $1,875,000 of tax-free wealth.

Wealth Without Taxes Report: Click For Your Report

The Easy Process To Identify and To Solve The Problems!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Income from your business, Inside Sale, Key People_Or Group, Passive Ownership, Selling Your Business, Strategies of growing business, Tax Efficient, Team, Valuation, Working On Your Business

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!

Featured by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Income from your business, Inside Sale, Life Insurance Types, Selling Your Business, Working On Your Business

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.

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

CLICK HERE

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

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, evaluations, Income from your business, Inside Sale, Passive Ownership, Selling Your Business, Strategies of growing business, Valuation, Value drivers, Working On Your Business

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!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Funding your Buy and Sell, Income from your business, Inside Sale, Life Insurance Types, Selling Your Business, Tax Efficient, Tax Free Income, Valuation, Working On Your Business

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

Borrowing money from the bank

Using cash flow out of the business

Life insurance death benefit

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

Creating Great Personal Wealth With Your Business Income!

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Life Insurance Types, Strategies of growing business, Tax Free Income, Working On Your Business

In my planning with many companies over the years, I realize that many business owners are not using the corporate cash flow to create wealth outside of the business. Normally they are using their after-tax dollars to buy financial products to create a benefit for them personally.

Many of the business owners feel they need to put all their current dollars into the business. This is a mistake! The reason this is a mistake is the business equity can get tied up just like a home-equity can. At a time when the business owner needs his business equity the most, is usually at a time when he cannot get it out for one reason or another. Business equity is not very liquid as it is tied up in receivables, loans, inventory, and the like. By putting too much of the business owner’s wealth in the business, they are risking the loss of it in the future, or the very least, the ability for its use for some major cost.

Owning a business creates opportunities to use the corporate dollars to create personal wealth outside the business. I call these benefits executive compensation. Normally you can arrange executive compensation programs to be highly effective and efficient tax wise. The corporate dollar can do more for you than the owner could do on their own personal dollar. We have many programs where the corporation is taking a deduction and creating wealth for the owner and their family which is positioned outside of the business.

Below is a project we worked on which shows the value of the corporate cash flow. The names of been changed to protect the innocent, but the case history explains how effective using your corporation cash flow to create wealth outside of your company!

The Case Of Joey Bag Of Donuts

This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business. You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came that he needed to exit his business. He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement_, and taking the wealth with you when you need it the most, can be a problem, if you do not have the right exit strategy. _

There are many reasons wealth gets lost in a business when it is sold. It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible. Therefore, he purchased his company building and put it in a separate LLC. Joey Bag of Donuts also believes in putting as much of his income into the company pension plan. Again, this plan is outside of the business.

We also taught him to have his company support whatever it can legally towards his personal lifestyle. For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through the company.

Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but did not want to use his own funds, so why not have the company support more retirement contributions?

He already had a profit-sharing plan, and he was sharing company contributions with his employees.

We decided that a non-regulated plan was the best way to go, so we developed a plan for only him. The plan is a combination of two concepts. We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).

The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.

THE PLAN: As you can see, the company made all the contributions, and took the deductions for them. Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement. He also could turn the cash into a tax-free income stream. In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000. Along with that he has a death benefit of $2,300,000 payable to his family tax-free.

THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds. All the contributions can be applied to just his account. He also has the use of the account before retirement, like a “family bank,” along with the ability to withdraw funds tax-free.[1] There would be no 10% penalty if withdrawn before 59 ½.

THE RESTRICTED PLAN: The “Restricted Plan” relates to an employee of the company that the owner wants to make a “A key person To Hold onto Forever.” This is a terrific way of giving someone a benefit with a vesting schedule, so they stay longer.

Summary: If you own a company and are not taking advantage of the CEEP program, you are missing one of the genuinely great executive benefits available to you as a business owner. The plan is flexible so you can design it to your needs.

OVERVIEW OF THE PLAN (Summary):[i] Type of Model: CEEP

EMPLOYER

Yearly Premium Payment: $25,000

Yearly Net Cost: $17,500

Total Gross Premium to Retirement: $675,000

Total Net. Premiums to Retirement: $472,500

Total Loans:

For Tax Costs: $202,500

For Interest Costs: $112,003

Net Cost of Loans: $314,503

If Loan Forgiven, Net cost: $220,152

EMPLOYEE

Annual Average Interests: $4,148.25

Loan Payoff AT Retirement:[2] $314,503

Net Cost: 0 (all funding came from Ajax Company)

AT RETIREMENT:

Rollout Amount: $94,350.83

Tax Cost on Forgiveness of loan[3]: $94,350.83

Net Cost to Mr. Joey Bag Of Donuts

ll : 0 cost out of pocket[ii]

Cash Value in policy after rollout/forgiveness: $793,4 29

Death Benefit After Rollout: $2,306,317

Tax-Free Retirement Yearly Income: $67,500

Equivalent Pretax Payout Before Taxes: $96,429

Years of Retirement Income:18

Total Retirement Income: $1,215,000

All and all, not a bad arrangement.

[1] Fund in excess of the collateralized amount.

[2] Funds are withdrawn from policy tax-free, results are “0” cost to Mr. Joey Bag Of Donuts

[3] Fund come from policy tax-free.

[i]This is only a summary of the illustration attached to this book. The illustration is a hypothetical model of how the policy would work.

[ii] This is a fully funded Employer plan. There is “0” cost out of pocket for Mr. Joey Bag Of Donuts

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This report will discuss the methods which will allow your business to use its cash flow to create wealth for you outside your business at the most tax effective way of creating wealth. Executive Compensation CEEP planning is more tax effective than a 401k, 403b, or any other pension and retirement plan.

As a business owner you have the opportunity to create an amazing amount of wealth with little tax cost. Start with the report and find out how you can create your wealth and your financial security for the future.

Tax Effective Strategies For RETIREMENT PHASE 2

Featured by YOUR BUSINESS WORTH, posted in Company Wealth, Estate Planning, Income from your business, retirement, Tax Efficient, Tax Free Income

In the Phase one report I discussed why only focusing on the accumulation stage of retirement could be a big mistake. I emphasized the need for tax diversification in retirement to create the largest after-tax spendable dollar to help maintain your lifestyle when you retire.

I have seen where people have allocated their investments in categories relating to the type of tax structure the investment has, and then positioning the category to a timing of when to start taking the withdrawals from the category. Here are the categories:

Type of Category	Contributions	Type of Growth	Distribution
Equities	After Tax	Tax Deferred	Growth Taxable
Taxable Income	After Tax	Taxable	Growth Taxable
Tax Free Income	After Tax	Tax Deferred	Tax Free
Tax Qualified	Pre Tax	Tax Deferred	Fully Taxable

One method of distribution would be to defer the withdrawal from accounts that are tax deferrable, to grow the value for as long as possible. As you can see in the chart above, most of the accounts are tax deferred. However equities, if they are individual stock, may be tax deferred when outside a 401k or IRA, only to be taxed when they are sold. They may have taxable dividends yearly which would be taxable. Equities could also be personally purchased mutual funds which are taxable, and in many cases are not the type of account where you can control the timing of the tax exposure.

One strategy would be to use the taxable income plans first to give the other plans the opportunity to grow through tax-deferment. Or, we have seen where clients pull out their taxable income from the investments and supplement the balance with tax-free income plans from life insurance or the Roth IRA.

Other Distribution Methods

One might consider taking the taxable income category first since the income is taxable. The 2nd category may be the qualified plan money since that is 100% taxable. The 3rd category may be the equities which are taxed less than then category 1, 2, and are taxed on a capital gain basis. The last category would be tax-free because, the assets can grow tax-deferred over a longer period, and then give off a tax-free income, normally when more income is needed (purchase power and time), and all income would be tax-free.

Sometimes you need to withdraw income from two or more categories for reasons. For example, let’s say you are now receiving social security, but you are also receiving taxable income from your mutual funds, but you don’t want to create more taxable income which may disqualify you from some potential benefit. Or by receiving more taxable income, your social security tax liability will jump from 50% to 85%.

A consideration under that situation would be to withdraw tax-free income to support the needed income without causing an increase in taxes. Another need may be to qualify for housing benefits like freezing property assessments. Tax-free income may be the only way to qualify.

Qualified plans such as 401k, 403b and IRAs, are the most heavily taxed. Most people deposit their retirement savings into company plans since they are readily available through their employer. Very rarely are employees educated as to the tax exposure of the account when they retire, and many are surprised at the taxes they have to pay on the withdrawals.

In my planning, I use quadrants, I call my system, the “Asset Cycle Portfolio” and make the qualified retirement plan and IRAs the main generator of income.

I suggest to our clients that they defer the tax- free income plans, but I do let our clients know that the plans are a great place to grab money for the support of their larger purchases such as cars, second homes, and other items.

By using the tax-free life insurance plans, or Roth plans, they avoid paying tax today, and can defer the other accounts. I like the idea of the “family bank”, using the life insurance, as you can withdraw the money tax-free, and then replace the funds. I find this a great vehicle with great flexibility for life’s changes.

It is not uncommon for our clients to finance their new cars using tax-free cash value and pay the loan back at an assumed low rate which they set. By repaying the loan just like they would if it were a bank, they create the ability to reloan in the future the same money.

For example, I have a client who purchased their high-end vehicle at the end of the lease by loaning his consulting firm the money to buy out the car. His firm now has to pay him back over five years at 3%. He will make about $3,000 in interest earnings, plus his company can take the tax-deduction on the interest of the loan paid to him.

The big picture

It’s more important to invest in different categories of assets to have the ability to develop a tax wise strategy when you retire, as opposed to a one demension investment strategy. By doing so, you can take advantage of tax laws, eliminate unnecessary taxes, and create family banks with effective tax leveraging.

For more informtion on how to use Tax-Free Life Insurance, request my FREE WHITE PAPER, “Wealth Without Taxes”