BUSINESS PLANNING STRATEGIES
Planning Strategies integrated with Life Insurance to help a business owner accomplish goals for Retirement, Business Perpetuation, Successful Business Transition, and Estate Planning.
Have you avoided planning because you don’t want to face certain issues involving your business? It’s easy not to think about challenging issues such as retiring, transitioning to a lesser role in your business, or facing your own mortality. But putting off planning and ignoring these issues isn’t going to give you peace of mind. Quick Finance has identified some key concerns facing business owners today and has some great planning solutions to consider:
I want my estate to have sufficient liquidity so that estate taxes and other costs do not adversely impact the business or my succession or exit plan.
Irrevocable Life Insurance Trust (ILIT)
What is it? - To what extent the business owner needs an insurance policy and has an estate size that is subject to potential estate taxation, it may be prudent to have the life insurance owned outside the business owner’s estate. An ILIT is an estate planning tool that is commonly used to accomplish this goal. It is designed to be the owner and beneficiary of a life insurance policy or policies. A properly drafted ILIT removes the life insurance policies from the insured’s gross estate and thus avoids subjecting the proceeds to estate taxation. Additionally, because the ILIT is also the beneficiary of the life insurance policy, the terms of the ILIT determine how the death benefit proceeds will be distributed.
"How does it work? - With the assistance of an attorney, the business owner establishes an ILIT to be the owner and beneficiary of a life insurance policy insuring the business owner’s life or the lives of the business owner and his or her Irrevocable Life Insurance Trust (ILIT) spouse. The business owner gifts cash to the ILIT in order for the trustee of the ILIT to pay life insurance premiums. Whether or not these transfers are subject to gift tax 17 depends on the business owner’s ability to make annual exclusion gifts and/or to use his or her lifetime gift tax exemption. If structured properly, the life insurance death benefit proceeds will be excluded from the business owner’s taxable estate and, as a result, will not be subject to estate tax. After the business owner’s death, the life insurance death benefit proceeds can be used by the trustee of the ILIT to purchase assets from or lend money to the business owner’s estate in order to provide the estate with the liquidity necessary to pay any estate tax due. It is important to remember that an ILIT is irrevocable and the business owner will not be able to change its terms after the ILIT has been established."
I want to protect my business in the event of the premature death of one or more key executives
Key Person Life Insurance
What is it? - The success of a business may hinge on the ideas and leadership provided by a key executive. Depending on the executive’s role, the business is at risk of losing large amounts of revenue in the event of the executive’s death. Given this potential risk, it may be prudent to implement a strategy that may assist a business in the event of the key executive’s sudden or unexpected death. Implementing such a “fall-back” strategy may ensure that the business is prepared to address not only the loss of income to the business attributable to that key executive’s unique skills and abilities but also the need to expend substantial amounts of cash to recruit and train a replace- ment executive. Purchasing cash value life insurance on the life of a key executive may provide the business with the type of financial security it needs to address the loss of a key executive.
How does it work? - The business purchases a life insurance policy on the life of a key executive. The business, prior to issuance of the life insurance policy, must provide written notice to the executive that it intends to be the owner and beneficiary of a life insurance policy on the executive’s life and may choose to continue the coverage beyond the executive’s employment. The business must also notify the executive as to the maximum amount of life insurance that could be placed on the executive’s life. The executive must give written consent to such life insurance coverage. The business pays all of the premiums and retains all ownership rights to the policy. If cash value life insurance is utilized, the cash value of the policy will accumulate in a tax-advantaged manner. If the key executive dies while the life insurance policy is in-force, the business will receive the policy death benefit pro- ceeds income tax-free. The business may use the death benefit proceeds or available cash surrender value to sustain operations following the key executives death.
I don't expect to have much of an estate tax liability but want my family to be taken care of and treated fairly upon my death without being dependent upon the continued success or disposition of the business.
Personally-Owned Life Insurance
What is it? - In some cases a business owner may not expect to have any estate tax liability but it still may be prudent to own the life insurance personally. The personally-owned life insurance policy serves the dual purpose of providing death benefit protection for the designated beneficiaries as well as providing potentially income tax-free access to the policy’s available cash surrender value for supplemental income purposes, if needed. Note that if the inclusion of the life insurance policy in the estate becomes problematic, the policy owner can still gift the policy out of the estate at that time.
How does it work? - The business owner will purchase and person-ally own a cash value life insurance policy on his or her own life, on the spouse’s life, or both. If the life insurance policy is properly structured, any increase in the policy’s cash value will be tax-deferred. The business owner, as owner of the policy, may take tax-free loans or withdrawals from the policy’s cash surrender value to provide for any personal or business needs. At the business owner’s death, his or her beneficiaries will receive the life insurances death denefit proceeds income tax-free. These funds are available to provide estate liquidity and to ensure the family is treated fairly.
I want to preserve the value of my business and keep it thriving for many years by incentivizing my key employees to remain with the business.
Restricted Executive Bonus
"What is it? - A Restricted Executive Bonus strategy that allows an executive to use business-provided dollars to fund an individually-owned life insurance policy. A Restricted Executive Bonus may provide selected executives with significant benefits such as life insurance death benefit protection and cash value accumulation for supplemental retirement income, as well as provide the business with a measure of control over the life insurance policy’s cash value. The Restricted Executive Bonus agreement and the policy’s direction form allow the business to limit the executive’s access to the policy’s cash surrender value until he or she meets the terms of a restricted access schedule. As compared to nonqualified deferred compensation, the Restricted Executive Bonus has the advantage of providing an immediate tax deduction of the bonus amounts paid to executives. The design may provide the business with a measure of control over its executives via a restricted access schedule as part of the agreement. Also, the life insurance is owned by the executive not the business so it is not subject to the business' creditors"
How does it work? - Working with an attorney, the business enters into a written agreement with the executive to assist with the purchase of a life insurance policy through a series of taxable bonuses. The bonuses are potentially tax-deductible for the business. The executive will use the bonuses to purchase an individually- owned cash value life insurance policy. The executive will name a personal beneficiary for the policy’s death benefit. The business will file a direction form with the life insurance company. The direction form states that the exercise of any policy ownership rights (e.g., access to the policy cash surrender value or surrender of the policy) except for beneficiary designation requires the signatures of both you (the employer) and the executive. A restricted access schedule can be utilized to give the executive incremental access to the policy’s cash surrender value. Once the access is no longer restricted, the executive may access the available cash surrender value of the life insurance policy tax-free through loans and withdrawals for emergencies or other financial needs. Keep in mind that the cash value accumulates without current taxation to the policy owner. At the executive’s death, the life insurance policy with be paid to the executives family tax free.