Shift Corporate Income For Your Personal Retirement! 

 If you own a business, using a split dollar life insurance plan can help you shift business income to you on a tax effective basis, without involving other employees!

 Split dollar life insurance refers to the concept of two or more parties splitting the benefits and costs of a life insurance policy, such as the premium, death benefit and cash value.   

The most common type of split dollar life arrangement involves an employer and the employee or owners, with one part owning the policy, one or both parties’ contribution to the annual premium, but both parties having a vested interest in the policy benefits.   

Split dollar plans are inexpensive and easy to administer as an executive benefit arrangement.   

Here is how it works:  

One party establishes a cash value life insurance contract under the ownership of the key executive.   

The employer receives a “collateral assignment” against the policy, entitling the corporation  to receive the lesser of the policy cash value or the outstanding loan balance.   The loan is based on the premiums contributed by the company.   The same assignment entitles the employer to a portion of the policy death benefit, equal to the outstanding loan balance.   

 The key executive pays the taxes each year on the foregone interest on the loan from the corporation to pay the premium.   

At some point in the future, the split dollar arrangement terminates when the employer’s loan is repaid (typically from the policies cash value), leaving the executive “free and clear” ownership of the accumulated gain in the life insurance policy.   

 The executive can access the accumulated gains in the policy by borrowing against it, which will typically allow for tax-free access to the values.  The policy loan is repaid to the insurance company at the death of the executive, and any residual death benefit is paid to the executives’ named beneficiaries.  

Split dollar is an easier benefit to implement than deferred compensation, and less expensive for the employer.   

 Advantages:   

  • Easy account entries 
  • Recovery of the cost for the employer 
  • Performance objectives to trigger the funding for employer 
  • Very little if any impact on company balance sheet 
  • A “golden handcuffs” for the employer and ability to set restrictions when cash value can be accessed  

 Today’s newer types of life insurance policies enhance the benefits of a split dollar plan  Continue reading “Shift Corporate Income For Your Personal Retirement! “

Business Valuation After The 2017 Tax Cut And Jobs Act

Because of the Tax Cut and Job Acts of 2017, the marginal rates are lower.  The impact of the recent tax cut is very straight forward.   Lowering the rate, means a higher after-tax cash flow which translates into higher value for businesses.

Business owners know their business better than anyone.  That being said, you would also assume they would know the value of the businesses? Not so fast!

Knowing your business and knowing what you think it is worth in reality can be two separate issues.  If it were that simple, appraisers would not be needed, but they are, and they play very key role.  They arrive at a fair market value after taking many facts into consideration.

Valuations; “The Walk Way Number

The “country club” concept of a business owner having a number in his/her head as to what they would take, if offered, offers some interesting conversations during happy hour!

Over the years I have spoken to business owners, and periodically I have been told that the owner has a figure in their head, and if they were offered that figure for their business, they would take it!  They seem to know their business better than anyone, so it is reasonable to believe they have a handle on the value of their company.   In more cases than not, that figure would allow the owner to go and do what they want in life as it would give them the capital needed, and the can walk away from the business.

However, there are some different sides to this concept!   A more logical way of knowing the business value!

Continue reading “Business Valuation After The 2017 Tax Cut And Jobs Act”

Drop Dead Business & Personal Planning  

  1. Have you wills and associated trust documents been updated in the past three years, if not, why not?
  2. Do you have the following: declaration for desire of natural death, power of attorney, and health care power of attorney? If not,why not?
  3. Doesyour testamentary documents make sure your family’s business and estate is private after your death?
  4. Areyour assets titled properly between you and your spouse in order to take maximum advantage of the estate tax laws?
  5. Do your testamentary documents specifically address the disposition of your family business/family assets?
  6. Do yourtestamentary documents agree with other business arrangements such as buy and sell agreements?
  7. Do you pass ownership of the family company/estate assets to your spouse in your testamentary documents as a tax avoidance measure? If so, is will that;

Make practical sense, and is that consistent with your wishes of your spouse? If the business ownership does go to your spouse, is there a potential for your children to inflate his/her estate thereby increasing their estate tax burden during his/her surviving lifetime?  Continue reading “Drop Dead Business & Personal Planning  “

Questions you need to ask yourself if you are a business owner!  

  1. When would like to be done working in your business?
  2.  After you leave your business how much cash will you need (each year) to achieve your personal financial objectives?
  3. Who can afford to buy your company and who would you like to buy it.
  4. As you think about leaving your business, what keeps you up at night?
  5. What is the business worth?  How do you know its worth that amount?
  6. Do you have key people that handle the day-to day operations of your business which you feel is a substantial contribution and one that would be hard to find a replacement?
  7.  Would their be a great burden if they left abruptly?
  8. Do you have a strategy in place to reward those employees who you feel are helping you grow your business?
  9. Do you and your partners have a buy and sell agreement in place which is funded and up-to-date?
  10. If so, when was the last time you reviewed the agreement, and discussed the method of business valuation at a trigger event?
  11. If you could no longer run your company , what arrangement have you made to make sure that your family will benefit from your life’s work?

 

Your Exit From Your Company!

I read somewhere that over the next number of years, at least one in every four small businesses will be sued or threatened with a lawsuit.  The odds are great that it will come from within the company.   

Will your death, disability, or withdrawal cause a dispute?  In many cases it can come from not having communicated the exit or transition plan for the company.    

 Your Corporate Board of Directors  

 The Board of directors in your company is crucial to the short and long-term success of the company.  The board helps in the avoidance and resolution of disputes.  The board can help direct the company’s planning, officer selection and the compensation.  The board can help in dispute avoidance, dispute resolution and overall corporate management.   

Disputes, can come from compensation agreements, benefits, health co-pays, benefits paid.  These are many other ares which a dispute can occur.  The hope is that there is a board of directors to help with the resolution.   

 When the owner dies, becomes disabled or just wants out of their business, and there is no business continuation or a buy and sell, the risk of a dispute rises.  A buy and sell agreement will establish the rules in the event a trigger that sets off a change within the business.  Remaining partners will need to know what the value of the company stock will be sold for.  The surviving family will need to know what the value of the business is and what the family expects to do with the company values.  Without a solid written plan, there are unanswered questions and confusion.  Continue reading “Your Exit From Your Company!”

Transferrable Intangible Assets. 

Cash flow is what adds value to your business.  The value of your business to a potential buyer can be measured based on the expected future cash flow.

The price someone is willing to pay depends on the predictability, sustainability and the growth of that future cash flow.

Key elements of value depend on the continued presence of the key tangible and intangible assets which have been developed.  They sync to produce a product or service.

Intangible Assets:

Your workforce:   This includes the experience, education or training of the workforce. A study of (McKinsey & Company) 13,000 executives from 120 companies and case study of 27 leading corporations, found that talent will be the most important resource in the next 20 years.

Information base:  This includes business books, records, operating systems and other information base. This includes customer related information base, accounting or inventory control systems, customer lists, newspaper, magazine, radio or television advertisers.    This relates to a systemized system of your operation.  A business with a systemized operation/process for producing and selling products or services, has a higher value.  By having a developed and documented operating system (like manuals), you create more value to your business which a buyer is willing to pay a premium for.

Supplied-Based intangibles: Sometimes a business may have a relationship with another business who is exclusive.  This could be anything from a unique part of an engine to space in a major store to sell products.  This can be favorable supply contracts, or favorable credit ratings.  This helps with the future value of the company.

Licenses and Permits (private or governmental):

Covenants not to compete:  For example, an exclusive territory which competitors can’t compete in.

Franchises, Trademarks and Trade Names: This give exclusivity to the organization.    Trademarks, and Trade names.

Government Licenses and Permits:  Any right or license granted by a governmental unit is an intangible assets. The right to use, sell, or service in an area which is unique just to a business will add value to the concern.

Going Concern Value: A going concern value is the additional value that attaches to the property by the reason if its existence as an integral part of an ongoing business activity.

Absence of contingent liabilities: A business not having pending litigation, tax audits or breaches of contracts.  Also, a company without negligence claims, product liability claims and other contingent liabilities is considered an enhancement of a business.

Goodwill: Goodwill is attributable to continued customer patronage expectancy.  The goodwill can create value because of the reputation, along with other factors of the trade or business.     The public perception of a business.

 

Transferring Stock does not mean you have to give up control. 

  stock option plan is an option to give the key employees more incentive to stay with your company and potentially purchase your company.   Usually the owner will sell to the employee (or employee group), 10%-25% in total.  The amount of the stock will always be less than the majority of the stock.   

 The key person has a better chance of financing future stock purchases from financial institutions by owning this amount of stock in the company.   This creates the building blocks of a future sale for the current owner.  

This percentage of ownership doesn’t give the key employee control of votes during shareholder meetings.  The majority owner can maintain control over the voting as long as the Articles of Incorporation and the Bylaws have been properly structured.   

Another options is to issue only non-voting stock to the key employee(s) in Tier 1.  By amending the corporations’s Articles of Incorporation, you can issues non-voting shares.  You can even do this with S corporation.  The one class rule of an S Corp does not apply as non voting stock is not considered a second class of stock for purposes of this rule.   

CONTROL IN SELLING YOUR COMPANY  

Usually corporate laws generally require at least two-thirds approval by the shareholders when the corporation has a major event as selling the company to a third party.    As long as you maintain at least that amount of percentage ownership, will have the ability to control the decision regarding a future sale.  Continue reading “Transferring Stock does not mean you have to give up control. “