Tax Effective Strategies For RETIREMENT PHASE 2

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”  

Planning For Retirement Using Investment And Income Tax Strategies (Part 1)

Planning for retirement and accumulating money for that future event is important for many people.  Their concern is to make sure they have enough capital to turn into cash and use as an income payment.  Another consideration is to make sure they don’t outlive their income, as their retirement could last longer than their working career.  

Many retirees will require a substantial amount of capital to provide the income needed to maintain their retirement lifestyle.   Most of the capital is focused on retirement programs, such as 401k/403b, IRAs, and other company sponsored plans.  

The focus is on saving and investing during the accumulation stage, picking investments that compliment what they think will create the capital needed at their target retirement date.  Because of this mindset I find that many people are putting their assets in one investment basket strategy.   By only thinking about an accumulation strategy, they are missing the mark on “net spendable income”, the true driver of their standard of living. They also need to also consider tax diversification strategy in order to accomplish the desired result.  

When people “cash out” at retirement for income, they are surprised to hear their qualified company plan is taxed at 100% of every dollar withdrawn, and that they are forced to take the money (through Required Minimum Distribution). They received a tax deduction on their contribution, which is a very small part of the total retirement pie.  Taxes are the single most expensive part of your retirement, and the component that is planed for the least. 

When consulting with our clients, we suggest they plan the two strategies in conjunction with each other.

  1. The accumulation of assets through investment or “The What”. Such as funds or accounts they wish to invest in.   
  2. The tax ramification of the investments– this is the “The Where”.  Such as IRA, 401, ANNUITY, LIFE INSURANCE – OR THE TAX RAMIFICATION, and the tax effects of each of them. 

There are two risks, investment risk, and tax risk which will erode your retirement nest egg.  

As you plan your retirement and investment you should think about the following: :

a. Diversification of the investments, this is called asset allocation. The purpose of this is to avoid as much risk as possible, while attempting to gain a consistent rate of return. 

b. Income tax diversification:  this is the “where” you have your funds and how will they be taxed when they are turned into cash. 

Taxes are unavoidable and income tax rates change. The assumption is they will be higher than now because Uncle Sam is always looking for more revenue, and normally the higher income earners foot the bill. 

With some of the products of today, you can minimize taxes, and in situations eliminate them altogether. 

When people invest in high taxable investments they have  no options when they distribute the funds to provide an income, they end up paying much more in taxes than if they had a strategy. 

 Part of our strategy is to have our clients recognize the consequences of putting all their assets in “one basket” for income purposes. They need the knowledge of how an investment can be “tax wise”, allowing them to blend their strategies for a lower net tax result.  

An example:  Sam grows his 401k to $600,000.  He can take income from the 401k of $44,149 a year for 20 years, assuming 4% ROI. The tax rate is 33% (state and Federal) as he has a pension and rental income, and his wife has a payout.  By having all of his assets in a taxable account, he will pay $14,569, for a net of $29,579. 

However, if he did some planning, he could have deposited money in a more efficient tax account where the payout would be tax free.  Let us say Sam invested enough money to provide $29,579 in his 401K AND he put the extra in his specially designed 7702 life insurance policy which gave him $14,569 tax free income.  Sam would only pay the taxes on the $29,579 or $9761, $4807 less in taxes.

Observation: 

Because most of the money was in a qualified plan (401k), Sam didn’t have the option of creating tax-free income. He could have converted some of the money to a Roth, however, he would have had a tax liability.  

Tax-strategy planning: is most important to retirees who will have to replace their income in the future. Diversification of retirement assets gives the retiree the option of deciding when the best time to sell, exchange, liquidate or annuitize asset classes.  

Reasons why income tax diversification is important

  1. Retirement can last a long time- in some cases longer than you have worked
  2. Limited working ability 
  3. Investments fluctuate in value
  4. The law changes over time- consequently so do tax rates

Income taxes have the greatest impact on your income, so it’s not as important as to the value of the asset as much as the tax structure of the payout of the asset.  

A cash rich life insurance policy may not grow as great as a mutual fund given the same amount of contribution over time.  However, when income is taken from the policy, it is tax-free.  The mutual fund withdrawal is taxed in some form, either partially, or 100%, depending on the where it was invested (IRA or personal holdings). Consequently, you don’t need as much value in the life insurance to give more tax-free income then the after-tax income from the investment.  

There are five ways to purchase retirement funds

  1. Personally
  2. Roth IRA Individually or through 401k Roth
  3. IRA – tax deduction
  4. Investment in a sub-account inside a variable annuity
  5. Life insurance variable, indexed or permanent

Some types of investment can be tax differently depending on where you purchased them. Life insurance and Roth accounts can create tax-free withdrawals.  

An IRA is 100% taxed upon withdrawal, the same as a qualified pension plan, 401k, 403b. 

Personal investments are partially tax-free(basis), while the other parts of the investment can be ordinary taxes, or capital gain. 

There are also Tax Elements to consider.  

  • Tax deductible contributions: like IRA, 401K/403B
  • Deferment of taxation such as qualified plans, IRA, Roth’s, life insurance, annuities
  • Non-Tax deductible, deferred taxation, and tax-free payouts, like life insurance and Roth IRAS

So it is important to understand “where” you are putting your retirement money, when considering investment and tax strategies. 

Phase 2.  Will discuss the retirement strategy of payout…. 

Request your FREE SPECIAL WHITE PAPER CALLED; Wealth Without Taxes,

Submit the form and we will send you the informative white paper explaining how to set up a tax-free income using your business, with little tax exposure. This is a plan for business owners!  

Pension Maximization Using Life Insurance To Provide The Guaranteed Capital!

For people who are in pension plans, (yes there are some in the private section, but mostly in the government sectors), they face a decision at retirement  of how to take the retirement income distribution. 

Basically,  they have two options.  They can take a lifetime income, which is the highest income the annuitant can receive over their lifetimes.  Or, they can take some variation of a survivorship  benefit for their spouse.  The 50% joint payout is the normal payout, however, some plans will allow 75% and 100%.  The higher the percentage spousal benefit, the lower the annuitant payout.     

Example:  

This example uses the joint and survivor 50% payout. 

Let us assume if the annuitant takes the single life payout, the payout would be $2,100 per month.  If the annuitant took the survivorship options, the payout would be $1,600.  There is a $500 difference per month.  Should the spouse die first, usually, the surviving annuitant is stuck with the $1,600 for their life.  

On the other hand, if the annuitant took the life income of $2,100 and dies first, the spouse receives nothing.  

Options: 

A great guarantee options, is to purchase  a life insurance  plan in the amount which will represent the present value of the survivorship value would be. 

By purchasing a $285,000 life insurance policy, using an assumption of 3% earnings on the investment, the payout would be guaranteed for 20 years.  If the annuitant wanted the $1,600 a month for a 25 year period, the present value is $334,332.  

Scenario: 

If the annuitant dies first, the pension would end, however, the life insurance would be paid tax free.  The surviving spouse could invested  the proceeds and take withdrawals from the account  equal to what the spouse would have received under the joint and survivor pension payout.  The spouse could take more or less, as needed. 

If the spouse predeceased the annuitant the  life insurance can be cashed out, or continue to stay in force to create a legacy for the family.  The policy also can also be used to supplement a retirement income for the annuitant using the cash value. 

Unlike the pensions joint and survivor option, the Pension Maximization Plan offers much more flexibility in the planning.  It also allows for maximum payout should the annuitant live a long life while providing security for the spouse. 

Special Free Report”; If you are interested in a tax-free retirement sponsored by your company, get this special report called; Wealth Without Taxes.  This is a plan designed for business owners and key executives, not the rank and file.  Besides tax free benefits, the program offers business owners the ability to shift business income to their personal ledger with minimum tax exposure. To get this report, CLICK FOR YOUR REPORT   Once you fill out your email information, you will receive the report.  Thank you. 


https://youtu.be/DF-GwmDD6kQ

Click to view a 4 minute video.

The Six Most Costly Financial Mistakes Business Owners Make Costing Them to Owe Huge Taxes!

Many business owners are unaware of the opportunities they have in creating wealth through their business.  Many owners put too much wealth in their business, where it can be tied up or hard to get out.  It also prevents them from accumulating outside retirement funds.

There are several ways to create wealth through your business on a tax-efficient basis which many owners are not aware of.  

I would like to share with you the six mistakes that prevent owners from creating more wealth by utilizing the business cash flow. 

  1. NOT IMPLEMENTING A CEEP: (Corporate Executive Equity Plan) for themselves.  This is one of the most tax effective methods of creating personal wealth using corporate cash flow.  The cost of providing this wealth creating account costs the owner about 30% of the tax cost.  Example: if the company bonused $20,000 to the owner for a personal retirement plan, the tax cost would be $6,000 each year.  However, under a CEEP arrangement, the cost would only be a $60 the first year, and about $1,200 the 20th year. This is one of the most misunderstood concepts in executive compensation by attorneys, insurance professionals and CPA’S.  Consequently, it might be considered under used.  However, the executive compensation specialist understands how the plans work and how it can be of great value for the business owner in shifting income from the company to the personal side of the owner. 
  2. NOT TAKING ADVANTAGE OF THE SECTION 412(e)(1): which allows the owner to make a substantial number of tax-deductible contributions into a retirement plan skewed towards the higher paid owner.  Example, the owner aged 50 can deposit up to $213,905 fully tax-deductible.  Great for good cash flow companies.
  3. NOT USING THE “SAFE HARBOR RETIREMENT PLAN”: where a substantial amount of the tax-deductible contributions can be allocated to the higher paid participants.  Also, included in this arrangement is the “Cash Balance Plan”.  These plans create greater tax-deductions for higher paid employees.   
  4. NOT TAKING ADVANTAGE OF   A RESTRICTED BENEFIT PLANS (RBP): which is a discriminatory and tax-deductible plan.  It can be used to provide valuable benefits to retain key people.  The business owner keeps the forfeitures if the employee leaves before vested. This can lock your key group to your company.  
  5. NOT CREATING A DEFERRED COMPENSATION PLAN:  This is a flexible, separate, and discretionary retirement benefit that can also become a mechanism for funding the sale of your business in the future and create retirement income. The pot is sweetened when you add a DBO (Death Benefit Only) to the planning. 
  6. NOT CREATING AND NOT FUNDING YOUR BUY AND SELL AGREEMENTS: A disability, long term illness, or death may occur long before the owner planned to exit their business, creating a path to financial disaster not only for the owner, but their family, partners, and employees.  This is one of the most egregious mistakes I see business owners make.  Many times, it goes unnoticed by the advisors.  This is one of the reasons why I am an advocate of check-off lists, “fire drills”, and annual reviews.[i]

Simply Put!  By Utilizing These Common Benefits, Owners Can Maximize Their Fullest Potential Business Value! 

To help you understand some of the ways to utilize your business cash flow to create more wealth for you and your family, I put together this FREE WHITE PAPER, CALLED “A TAX -FREE LIFESTYLE FOR BUSINESS OWNERS”, AND I would like to GIVE this FREE WHITE PAPER TO YOU.  

THIS REPORT will help you understand how you can use your business to take advantage of discriminatory benefits   plans for yourself, family members, and key employees.    The Tax-Free Lifestyle REPORT is strictly for small business owners who want to grow their business while creating more wealth outside of their business.   I designed this white paper to help business owners avoid the COMMON MISTAKES made by other business owners which forced them to work more years, save less retirement, pay more in taxes, and tied up too much wealth in their business, creating more stress, and had no free time for themselves! 

You’ll also discover in the TAX-FREE REPORT:

  • One simple concept allowing you to retire with more wealth or retire years sooner.  (This one simple financial principle is rarely ever talked about on “pop news” financial TV shows or by other so-called “financial planners”. 
  •  2 proven strategies to increase cash flow and reduce expenses if you really want to sleep at night!
  • 3 secret ways to have your business build a tax-free wealth account for your personal and business use!
  • Your Business DNA” Understanding this key allows you to double your savings and retirement investing without making a single dollar more in income or investing in more capital equipment and labor.
  •  5 value drivers to prepare your business for a sale, even 20 years in advance!
  • How a simple inexpensive benefit plan can keep your key people! 
  • How creating a Deferred Compensation plan can help finance the future sale of your business.
  • How having a benefit plan for you in the future can lower your cost to sell your business?
  • Misleading and incorrect “old wives’ tales” about creating wealth in your business. 
  • Tax saving strategies that 9 out of 10 business owners don’t use and end up paying more taxes
  • Much more…

TO RECEIVE YOUR FREE   NO OBLIGATION WHITE PAPER Called: 

The Tax-Free Lifestyle for Business Owners”

To request your free white paper 

CLICK SUBMIT:     Wealth Without Taxes Report

Once you submit your email address, you will receive your report immediately! Enjoy!

Now you may be asking…Why would I spend my own money to send you this FREE WHITE PAPER? Think of it as my personal introduction… a way for you to get to know me better.  Nothing more than that! 

Often enough, when business owners learn the information in this guide, they decide they want to know more about what we do, and possibly do business with us so they can have our business owner expertise and in-depth knowledge of how business owners think.  I know, I am one of them. I know what you think because I think about it all the time.  Let’s say 24/7 to be safe! Just as you value the expertise in your business field, I believe working with a financial expert who knows what it is to run a business and knows the business world is critical to your financial health.

That’s it!  Let me send you “The Tax-Free Lifestyle for Business Owners”.   Do with it what you want. Maybe you’ll want to talk to us further, maybe you won’t.   There is no obligation to do so.

Either way, I think you’ll find the information in this report will be immensely valuable to helping deal with the “what if’s, grow your business value, enjoy it more, and create more time for you and your family while creating an almost “stress-free” life with tremendous financial freedom in the future.  Oh yes! NO TAXES EITHER!    Visit www.yourbusinessworth.com  to learn more! 

FOR A 7 MINUTE VIDEO


[i] Paul Hood: “Buy and Sell Agreements- the last will and testament for business owners”.  Paul discusses his check off list, and his “fire drill”.  I am an advocate for these systems to make sure the buy and sell agreement is a perfect of a fit to the entity and owners as possible. 

Pending Tax Changes May Be Around The Corner 2022!

 

I am currently reviewing some of the pending tax proposals being presented. Again, these are proposals and most of them will change before enacted.  

It occurred to me as I was reviewing the details of the tax proposals, how many changes I have seen over my long planning career.  It made me think of  how many times clients (YOU AND ME) had to  update our plans at our cost.  It is amazing the disregard the government has for the U.S. citizen in making this system easier to work with. I can understand why so many citizens put off planning, or just get tired of updating.  Unfortunately, this is the reality of the tax system and the changing of administrations.  

In 2017 we had a major income tax change which in most cases helped many  citizens lower their taxes.   It was easy to understand and it did what it was suppose to do, stimulated the economy along with increasing  public confidence.  

It also gave estate owners a path to plan to preservation their estates. The tax policy was working very well and our government tax coffers where growing.  

Pending Tax Changes- Again These are only proposals!  

The Green Book 2021  

Sr. Van Hollen (Sensible Taxation and Equity Promotion (STEP) and other plan such as the American Families Plan, and the “For the 99.5% Act (Bernie Sauders)”  

Income Tax Changes 

  • Top income tax rates 37%-39.6% effective January 2022; > $509,300 for married, and $452,700 for single 
  • Restrict tax deferral, “like-kind exchanges” (swaps of real estate that avoid current taxation that a sale would tigger  
  • Capital Gains might double-(sale of stock, investment real estate, etc. ) qualified dividend with incomes over $1million taxed at ordinary rates. This could be triggered for gains after April 28, 2021 

Social Security Taxes 

  • To coordinate the net investment income and self employment taxes, so unlike current law, a company could pay the owner a reasonable salary or guananteed payment, the overage became federal taxable profits, but not defined as payroll taxes.   This was assuming that the salary, and withdrawals were reasonable  compensation .  

The proposal is to tax pass-through business income (e.g. S Corps, limited liability companies, partnership) of high income taxpayers will be subject to either the net investment income tax or the social security taxes.   

Audits from the IRS: $80 BILLION increase over 10 years for IRS for audits.  

Estate and gift tax:  

  • Bernie Sanders proposal (For the 99.5% Act) calls for a return to lower estate and gift tax exemptions as well as significant changes to the rules on GRATs and grantor trusts 
  • Most dramatic:  Biden’s plan is to make the transfers of property by Giftand on assets owned at death (as of January 1, 2022) triggering events for capital gains taxes.  The gain is measured by the date of gift or death fair market value less basis.   
  • Exclusions: transfer at death to a US spouse.  

So there are other potential changes coming down the pike and we’ll have to wait and see.  Here is the bottom line:   

Split Interest Gifts: Grat’s ; watch for developments 

Grantor Trusts:  At Grantor’s death or trust is no longer revocable 

BOTTOM LINE- 

If you are a business owner with wealth in your business and you have not done any planning, it may be a good time to start thinking about a certified appraisal of your business and your holdings.  Also, you might want to start thinking about what your goals would be for passing your estate assets.  It’s to early to tell where the wind will blow and how you will be affected by any change, but it is not too soon to think of what you wish to accomplish in your estate and business planning. 

As I look some of the potential changes, Life Insurance Planning will become more significant in paying for the additional liabilities of passing your estate assets either by gift or death.  

To help you with your planning, I would like to offer to you my newly published Ebook called,”Unlocking Your Business DNA”. In the book I cover strategies I have used with business owners for over 50 years  with powerful strategies to create growth and profits in your business and also create an amazing amount of leisure time. 

To get the book, CLICK AND SUBMIT 
 
OR,  
 
If you with to receive a free business assessment of your business planning, take our ONE MINUTE SCORECARD SURVEY. Literally, it takes one minute to go through. Once submitted I will send you a FREE ASSESSMENT of our findings. We will be able to pin point the strong point and the points that you need to work on to create more business growth and profits.  

CLICK HERE FOR THE ONE-MINUTE SCORECARD  

More to come… stay tuned.  

Treating Your Children Equally Or Fairly!

Leaving assets Equally or Fairly!

The One Page Issue

The Issue Overview:    

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

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

Rents and salary are where the family derives their income.

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

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

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

One Page Issues:

Summary of Issues:  

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

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

C. Distribution of business assets to the son A

D. Estate settlement costs and taxes.

ONE PAGE SOLUTION!

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

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

Overview

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

Bottom Line:  

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

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


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

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

Business Owners Essential Planning Tools! Part 2!

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

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

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

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

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

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

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

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

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Operating Agreement:  

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

Buy-Sell Agreement

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

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

Type of Buy and Sell agreements:

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

Provisions in the buy and sell agreement

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

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

Other Methods To Transfer Property:

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

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

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

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

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

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

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

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

The Bottom-Line Thought

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

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

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

Business Owners Essential Part 1 Of 2

Introduction 

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

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

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

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

Basic Planning documents:   

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

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

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

Advanced Directives Business Powers of Attorney:  

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

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Power of attorney (POA):  

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

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

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

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

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

WILL:  

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

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

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

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

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

Revocable Living Trust (RLT) 

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

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

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

Limited Liability Company.  

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

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

Business Succession Planning  

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

Objectives:  

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

Major Challenges 

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

To be continued in Part 2 

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

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

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

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

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

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

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

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

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

Business Succession:   

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

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

Example:  Sole Proprietor 

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

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

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

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

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

PROFIT  PROTECTION 

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

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

The benefit will help the owner:  

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

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

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

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

Golden Handcuffs 

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

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

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

 THE GOLDEND HANDCUFFS  

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

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

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

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

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

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

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

A Tax-deductible Life Insurance Plan 

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

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

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

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

The OPBS does many things, among them:

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

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

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

The Sale of Your Business to The Outside: 

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

Tools needed:

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

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

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

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

 LESS THAN A MINUTE SURVEY

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


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