Estate Planning Chaos for the Business Owners

November 25, 2022 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:

No control of deposit amounts

Limited contributions

Government controlled IRS FILING

Administration costs- actuarial costs, filing, accounting

Employer is the fiduciary is having responsibility and accountability to the plan (what happens when the employee loses money in the market?)

After-tax cost and non-recovery of the net outlay for the company

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

The withdrawal is 100% taxable on all the funds

Tax exposure and penalty for using the funds before 59 ½.

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!

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

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

WHO WANTS TO BUILD MORE WEALTH THROUGH THEIR BUSINESS?

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

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

Wealth Without Taxes Report: Click For Your Report

Tax Effective Strategies For RETIREMENT PHASE 2

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

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

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

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

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

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

Other Distribution Methods

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

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

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

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

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

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

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

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

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

The big picture

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

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

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

Featured by YOUR BUSINESS WORTH, posted in Income from your business, retirement, Tax Free Income

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.

The accumulation of assets through investment or “The What”. Such as funds or accounts they wish to invest in.
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

Retirement can last a long time- in some cases longer than you have worked
Limited working ability
Investments fluctuate in value
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

Personally
Roth IRA Individually or through 401k Roth
IRA – tax deduction
Investment in a sub-account inside a variable annuity
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!

Recent Posts

Category: retirement