Category: Life Insurance Types

Life Insurance and Estate Costs: A Smarter Way to Create Liquidity

by YOUR BUSINESS WORTH, posted in Estate Costs, Estate Planning, Executive Benefits, Life Insurance, Life Insurance Types, One Big Beautiful Bill, retirement, Selling Your Business, Tax Efficient, Tax Free Income, Transfer Costs

Why pre-planning with properly structured coverage can help families avoid forced sales, costly borrowing, and value destruction when taxes come due.

By Thomas J. Perrone, CLU, CIC

If most of your wealth is tied up in real estate, a family business, or long-term investments, your estate can be “asset-rich but cash-poor.” The challenge is that estate taxes and transfer costs can come due quickly—often before heirs have time to sell assets thoughtfully or arrange financing

The overlooked question in estate planning

For many business owners and high-net-worth families, estate planning focuses on what will be transferred and to whom. Just as important is the practical question that determines whether a plan works in real life: Where will the cash come from to pay estate taxes and other transfer costs—on time?

The issue is rarely a lack of wealth. It’s a lack of liquidity—and a very real deadline.

One of the most effective ways to solve this problem is also one of the most misunderstood: using life insurance to fund estate taxes and transfer expenses efficiently, without forcing the sale of long-term assets.

The real problem: a deadline and a liquidity crunch

Estate taxes and transfer costs are not optional—and they don’t wait. In many cases, they must be paid within nine months of death.

That timeline can create a liquidity crunch when a large share of an estate is tied up in:

  • Real estate
  • Privately held businesses
  • Illiquid investments

When the calendar and the balance sheet don’t line up, families can be pushed into expensive decisions at exactly the wrong time.

Four ways estates typically cover the bill

Most estates end up using one (or a combination) of the following approaches to cover taxes and transfer costs.

1) Cash on hand

It’s simple—but it can be inefficient. Holding large amounts of cash can mean giving up long-term growth and flexibility. For many families, keeping millions in low-yield accounts “just in case” isn’t realistic.

2) Forced sale of assets

When liquidity isn’t available, families may have to sell assets quickly to meet the nine-month deadline.

Imagine being forced to sell:

  • A commercial property
  • A family business
  • Land or long-held investments

…all on a tight timeline.

That can lead to a fire sale—assets sold below market value—eroding wealth that may have taken decades to build.

3) Financing the tax bill

Another option is borrowing money to pay the estate taxes.

Borrowing can preserve assets, but it introduces new risks and costs, including:

  • Interest costs
  • Long-term debt obligations
  • Uncertainty around loan approval

Financing may preserve assets, but interest and repayment terms can drive the total cost well beyond the tax liability. And credit availability can tighten at exactly the wrong time.

4) Life insurance (a strategic liquidity solution)

This is where planning changes everything.

When life insurance is owned by a properly structured trust, it can create liquidity exactly when it’s needed—without disrupting the investment portfolio, the business, or the family’s long-term plan.

A real-world example

Consider this scenario:

  • Age: 59
  • Net worth: $15.5 million
  • Projected estate value: $46 million

The estimated tax bill: $18.6 million due within nine months.

Now compare the cost of each strategy:

  • Cash: forfeits future earning potential on the dollars held back
  • Forced sale: can exceed $20 million when assets must be sold at a discount
  • Financing: approximately $23 million over time, depending on rates and terms
  • Life insurance: about $4.8 million in total cost in this example

That’s roughly 74% less expensive than the next best option.

Why life insurance often comes out ahead

Life insurance stands out for several key reasons:

Cost efficiency

Properly designed coverage can provide required liquidity at a fraction of the cost of holding idle cash, selling assets under pressure, or borrowing.

Tax advantages

  • Death benefits are generally income tax-free
  • Can be structured outside the taxable estate

Predictability

Unlike market-based holdings, a policy’s death benefit is designed to be available on a known event, with no market-timing risk.

  • No volatility
  • No timing risk
  • Guaranteed payout when needed

Potentially strong effective returns

Depending on age, underwriting, and product design, the internal rate of return on a death benefit can be attractive (often cited at 10%+ in illustrations), with a potentially higher tax-equivalent return depending on your bracket.

The power of pre-planning

One of the most important insights is this:

Life insurance isn’t just an expense—it can be a pre-funded liquidity solution.

With current tax laws, individuals may have the ability to:

  • Gift funds into a trust
  • Avoid gift taxes within certain limits
  • Systematically fund a future tax obligation

This transforms a reactive problem into a proactive strategy.

Final thoughts

Estate planning isn’t just about transferring wealth—it’s about preserving it.

Without proper planning, families may be forced into:

  • Selling valuable assets
  • Taking on debt
  • Losing a significant portion of their legacy

Life insurance offers a smarter alternative:

  • Lower cost
  • Greater certainty
  • Minimal disruption to your estate

Bottom line

If you expect your estate to face taxes or transfer costs, the real question isn’t if you’ll pay—it’s how.

And as the numbers clearly show:

For many families, life insurance is often the most efficient way to do it.

Work with your estate planning attorney, CPA, and insurance advisor to model the expected estate tax exposure, test different liquidity strategies, and determine whether a trust-owned policy fits your objectives and timeline.

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Download your free report:  The Big Beautiful Bill Tax Change Guide – this guide will help you understand all the opportunities this tax bill has offered to business owners.

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tperrone@necgginc.com

 

Using A SLAT with Life Insurance 

by YOUR BUSINESS WORTH, posted in Estate Planning, Life Insurance Types, Tax Efficient, Tax Free Income, Team

BY: Thomas J. Perrone, CLU, CIC 

Since 2017 the SPOUSAL LIFETIME ACCESS TRUSTS (SLAT) have been an exceptionally good planning tool, and a popular one in sheltering the growth of assets from estate taxation.  

With the event of up and coming “the sunset” in 2026, more attention has been given to using this planning tool.  

In this video, I discuss not only what a SLAT is, and how it is used, but bring into play the arbitraging of life insurance, and the powerful results from using it.  

It is suggested that the planner learn as much as possible about the use of the SLAT.  Also, the planner should work with a qualified attorney when presenting and implementing this planning technique.   

Free__ YOUR SUNSET PLANNING GUIDE –   CLICK THIS LINK FOR FREE DOWNLOAD 

Tperrone@necgginc.com  

Connelly – Alternative 2024 

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

Thomas J. Perrone, CLU, CIC

Connelly was a hard case to digest as most of us who have been around the planning world for an exceptionally long time. We took the consequences of funding a stock redemption agreement as very normal.  As normal as “cutting the end of the ham first.”  

We are now forced to rethink this situation after the ruling, care must be taken when arranging the Buy and Sell Agreement and funding of a company, to avoid the results we have seen in Connelly.   

Today I will bring you through a few options that advisors and business owners may consider when planning the transition of business interests.   

  CLICK HERE;     YOUR REPORT WILL DOWNLOAD IMMEDIATELY! 

tperrone@necgginc.com

Take the Planning Tools Out of the Shed- You’ll Need Them!  

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Buy and Sell Agreements, Company Wealth, Estate Planning, evaluations, Executive Benefits, Funding your Buy and Sell, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, Passive Ownership, retirement, Selling Your Business

Thomas J. Perrone, CLU, CIC

After the 2017 Jobs Act, many of us (estate and business planners), had to shift our planning topics to moderate estate, Medicaid and income tax planning.  

Many of the tools we used prior to the 2017Jobs Act were often used in the planning process, simply because more business owners were affected and exposed to the Federal and State Estate Tax System. Consequently, more sophisticated strategies were needed to shift value, freeze value, or shelter value from the estate.  

Once the Jobs Act came into play, the exemption amounts eliminated many small business owners from the problem of estate taxation.  

However, with part of the Jobs Act heading for Sunset, we may see more businesses becoming exposed to Federal and State estate taxation.  

Time to go to the shed if you want to play in this market.  

This video will help guide you to some of the areas of planning you will have to dust off and rekindle for use.  

Download your Free Business Guide which will help explain many of the topics discussed. Immediate download, CLICK HERE! 

Thomas J. Perrone, CLU, CIC

tperrone@necgginc.com

Benefit Planning Executive Bonus Arrangement1 

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

An executive bonus arrangement is a method of compensating selected key employees in  which the employer pays the premiums of a life insurance policy covering the employee’s life. 

How the Plan Works 

●Life insurance policy: The employee purchases, and is the owner of, a life insurance 

policy on his or her own life. The employee retains – at all times – the right to name 

the policy beneficiary and to receive the death benefit. 

●Employer not a beneficiary: The employer cannot be the beneficiary, either directly or 

indirectly, of the insurance policy. 

●Written agreement: A written agreement provides for payment of a “bonus” in 

exchange for the employee’s agreement to continue working for the employer. The 

employer may also wish to pay a “double bonus” to help cover the employee’s 

additional income tax liability. 

●Premium Payments: The employer may make the premium payments directly to the 

life insurance company, or the payments may be included in the employee’s paycheck, 

with the employee paying the premiums. 

●Tax treatment – employee: The employee includes in current income – and pays tax 

on – the net premium paid by the employer. 

●Tax treatment – employer: Subject to the “unreasonable compensation” rules, and as 

long as the employer has no interest in the policy, the additional compensation is 

deductible to the employer as an ordinary and necessary business expense. 

Benefit to Employer  Benefit to Executive 
Can reward selected key executives with varying coverage amounts. The executive owns the policy. If he or she changes Employers, the policy is not lost.  
Simple to implement, with little or no administration  Accumulated cash values can be used in emergencies, at retirement, or for personal costs investments.2  
Premium costs are tax deductible. Death benefit is generally received income-tax free.  
Can be stopped without IRS approval or restrictions. Proceeds may be used for estate settlement costs.  

1 The discussion here concerns federal income tax law. State or local income tax law may vary. 

2 A policy loan or withdrawal will generally reduce cash value and death benefits. If a policy lapses, or is surrendered with a 

loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy. Policies  considered to be Modified Endowment Contracts (MECs) are subject to special rules. 

For a free report on Business Retirement Plans for Small Business Owners, click and submit. The report will be downloaded immediately. Learn how to use your cash flow to create tax-free wealth! 

Click Here! 

ESTATE PLANNING The LOST FOCUS

Featured by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Estate Planning, Funding your Buy and Sell, Life Insurance Types, retirement, Selling Your Business, Strategies of growing business, Valuation, Working On Your Business

By Thomas J. Perrone, CLU, CIC

Since the exemption credit increased to a substantial amount a few years ago, the term “estate planning” took on a new meaning.  

At one time  estate planning was considered tax planning along with other aspects of planning of your estate, depending on whether you owned a business or not.  Things like income for the family, debt payments, taxe reduction, income tax planning, and of course distribution of assets.  There was always an emphasis on avoiding estate and state estate taxes.  

However, as the exemption credit increased to the point that most American tax payers  would be exempt, the emphasis change on how estate planning was done.

However, in 2025 the sunset provision will kick in and will redefine the estate planning landscape.  The provision is set to go back to the exemption credit of about $600,000.  However, most professionals feel it will be higher.  Anyone’s guess.

With the possibility of lower exemption, estate planning will change.  I personally feel small business owners will feel the impact more than most, as their business values will increase their potential exposure to Federal and State estate taxes.   

Estate planning is an essential aspect of managing a small business. It can help ensure that your business is preserved as you want it to be, and that it can continue to operate smoothly even after you pass away. Part of estate planning for business owners will be to focus on the transition of the business more than before. If the exemption is lowered, small business owners will find themselves having to deal with a large tax at their death, upon the transfer of the business. Much can be avoided by doing planning now and using the exemptions available today.

Areas that need planning are:  

  1. Drafting a will and basic estate plan.
  2. Planning for tax efficiencies.
  3. Sorting out issues in family-owned businesses.
  4. Drafting a buy-sell agreement (for multi-owner businesses).
  5. Purchasing life and disability insurance.
  6. Creating a succession plan.
  7. Having a discussion with affected parties.

In order to have a proper discussion about estate planning the short video below will help you understand the main concept of asset distribution.  If you are a small business owner, this information may be critical to your planning structure.  

Request our FREE ESTATE PLANNING GUDIE FOR BUSINESS OWNERS:

For our FREE ESTATE PLANNING GUIDE FOR BUSINESS OWNERS, submit this short form AND the Estate planning guide will download immediately.  

The Guide covers many of the areas you need to understand when doing your estate plan. It is also written in language you will understand.  

Download Your Free Estate Planning Guide 

CLICK HERE

For a better understanding of Estate planning view this short video of how asset distributions work in different estates.

Note: I engage in a working relationship with professional advisors for their business cases.

203 530 6615

tperrone@necgginc.com

 

The Benefits Of Keeping Your Key Person And Key Group!

by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, evaluations, Executive Benefits, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, Strategies of growing business, Tax Free Income

 

Recently, I wrote an article about the “Quintessential Employee” and covered all the benefits of having a key person in your company. 

The Education of the Quintessential Employee! 

Some of the attributes of the key person are:  

  • Creates more business value by freeing owners to focus on other profitable tasks 
  • Purchasers of a business want to have middle management in place 
  • Builds reputation and culture 
  • Key people tend to impress other employees as a good example 
  • Key people, as described, are also likely future purchasers of the business, or 
  • Likely to run the business while the owner enjoys life, but still has the control and wealth 

For the full article, download The Benefits Of Keeping Your Key Person And Key Group

Enjoy the download of the full article. The link in the article will download immediately the option of receiving the report.

Download The Article

Estate Planning Chaos for the Business Owners

by YOUR BUSINESS WORTH, posted in Business Growth and Transition, Company Wealth, Estate Planning, Executive Benefits, Income from your business, Inside Sale, Key People_Or Group, Life Insurance Types, retirement, Selling Your Business, Strategies of growing business, Tax Efficient

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 owners. In 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 planning. Their estates are complex, and they need more than surface planning when their situation calls for more complex planning to carry out their goals. This takes more time and money. Without 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 changes. It is too late! All 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 planning. Being unaware of these changes makes them vulnerable to excessive estate settlement costs. In many cases the business owner loses by default. 

No liquidity: Settling the estate takes money. In 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 issues. Consequently, 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 liquidity. When an estate owner dies, there is a guarantee that a tax-free death benefit will create the liquidity needed. Funded 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 options. This 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 systems. Everything is in their heads, literally. There 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 business. Purchasers are looking to buy a business that has growth potential. Nor 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 above. This is a major issue with companies. A true test is asking the business owner if they can take 30 or more days off a year. If 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 reasons. Qualified 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 employees. However, for the business owner, Executive Compensation plans are more useful. Here 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 income. It could be passive income from rents, income from the business and income from investments. 
  •   IRS in your life – Qualified plans need to file with IRS. However, 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 bank. The family bank allows the owner to use the money, tax-free, any way they wish. Also, 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 planning. CLICK 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” 

Featured by YOUR BUSINESS WORTH, posted in Company Wealth, Executive Benefits, Income from your business, Life Insurance Types, retirement, Strategies of growing business, Tax Efficient, Tax Free Income

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 0 165,099 

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! 

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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