This is the case of Joey Bag of Donuts and his pursuit of keeping wealth outside of his business. You see, over the years working with Joey Bag of Donuts we told him that leaving too much of his wealth in the business can be problematic, especially when the time came when he needed to exit his business. He heard me tell him many times, that someday he will leave his business by either a death, disability, or retirement, and taking the wealth with you when you need it the most, can be a problem, if you don’t have the right exit strategy.
There are many reasons wealth gets lost in a business when it is sold. It can range from bad planning to bad luck, but Joey Bag of Donuts always remembered to keep as much of his personal wealth outside of the business as possible. By the way this is why he purchased his company building and put it in a separate LLC. Joey Bag of Donuts also believes in putting as much of his income to the company pension plan, again, outside of the business.
We also taught him to have his company support whatever it can legally towards his personal lifestyle. For example, his cars, gas, some entertainment, health insurance, retirement, and other things are paid for through company.
Joey Bag of Donuts wanted to put more money away for himself and his family’s future, but didn’t want to use his own funds, so why not have the company support more retirement contributions?
We already had a profit-sharing plan, and he was sharing company contributions with his employees.
We decided that a non-regulated plan was the best way to go, so we developed a plan for only him. The plan is a combination of two concepts. We call this the CEEP PLAN (CORPORATE EXECUTIVE EQUITY PLAN).
The plan is a discriminatory plan, so Joey Bag of Donuts can pick himself or anyone else he wants, unlike a profit sharing or 401k plan, which is a regulated plan.
THE PLAN: As you can see, the company made all the contributions, and took the deductions for them. Joey Bag of Donuts was the sole participant of the plan. His cost was “0” out of pocket and he ends up with almost $800,000 of cash at retirement. He also could turn the cash into a tax-free income stream. In this case it was $67,500 tax-free income. The stream of income is worth more than $1,215,000. Along with that he has a death benefit of $2,300,000 payable to his family tax-free.
THE BOTTOM LINE: Joey Bag of Donuts gets retirement income using corporate funds. All the contributions can be applied to just his account. He also has the use of the account before retirement, like a “family bank”, along with the ability to withdraw funds tax-free. There would be no 10% penalty if withdrawn before 59 ½. Continue reading “Case Study#5 Using Corporate Dollars To Keep Wealth Out Of The Business But In Your Pocket”