business owner insurance planning by mark simon
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Planning For Planning For Business OwnersBusiness Owners
Presented by:Mark L. SimonFinancial Services ProfessionalCalifornia Insurance License No. 0E41454
2 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Benefits For:Benefits For:
You and your key persons onlyAll of your employees
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Benefits For You Benefits For You & Your Key People:& Your Key People:
Supplemental executive retirement plan (SERP)
Executive bonus plan
Split-dollar insuranceBuy-sell fundingKey person
protectionDisability income
insuranceEstate planning
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Benefits For All Employees:Benefits For All Employees:
Qualified pension plansGroup life and health
insurance
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Ideal Fringe Benefit Ideal Fringe Benefit From a Tax StandpointFrom a Tax Standpoint
Current tax deductions for the business
Deferred tax to recipient
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Cost to CorporationCost to Corporation
Corporate Tax Bracket (%)
Tax-deductible Corp. Dollar
After-tax Cost
34% $1.00 $.66
15% $1.00 $.85
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Tax-Deductibilityis only one factor to be
considered
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Ideal Fringe Benefit Ideal Fringe Benefit From a Planning From a Planning StandpointStandpoint
Relieves an employee of a personal non-deductible expense
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Income Tax RatesIncome Tax Rates
Affect business planning
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Personal Tax Bracket vs.Personal Tax Bracket vs.Corporate Tax BracketCorporate Tax Bracket
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Benefit Planning Benefit Planning Key Questions:Key Questions:
1. Is it deductible?
2. Who controls benefit values?
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What is Most What is Most Important to You?Important to You?
Tax-deductibilityor
Control of benefit
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Types of BusinessTypes of Business
Sole proprietorshipPartnershipC corporationS corporationProfessional corporationLimited liability company (LLC)
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Sole ProprietorshipSole Proprietorship
A business owned entirely by one person
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PartnershipPartnership
An association of two or more persons as co-owners of a business for profit
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CorporationCorporation
A separate legal entity apart from its owners
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S Corporations Enjoy:S Corporations Enjoy:
Limited liabilityEmployee benefit advantages (for non-shareholders)
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S CorporationS Corporation
Taxed like a partnership
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Professional CorporationsProfessional Corporations
Organizations of physicians, lawyers and other professional people
Treated as a corporation for tax purposes
Not taxed the same as C corporations
Can elect S corporation status
20 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Limited Liability CompaniesLimited Liability Companies
An LLC member’s potential liability is limited
LLCs are not burdened by ownership restrictions applicable to S corporations
LLCs may have more than one class
of stockPreferred allocations of profits and losses are allowed*LLC law is relatively new and uncertain.
Consultation with an LLC expert in your state is recommended.
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Choosing the Form of Choosing the Form of Business OrganizationBusiness Organization
TaxationLimited liabilityEmployee benefits
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Key Person InsuranceKey Person Insurance
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Who is a Key Person?Who is a Key Person?
High salary levelDecision-making powerAbility to implement plansFinancial leverageSpecial talent
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ProblemsProblems
Disruption of managementReduction in earningsImpairment of creditLoss of confidenceReplacement costs
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How Key Person How Key Person Insurance WorksInsurance Works
Key Employee
Business
Premiums
Death Benefits
•Business owns and controls the policy.
•Business is the premium payor and policy beneficiary.
•Business receives tax-free death benefits.
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Adopt A Adopt A Corporate Resolution Corporate Resolution
Why?To fully protect
your business
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Executive Executive Fringe BenefitsFringe Benefits
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Supplemental Supplemental Executive Retirement Executive Retirement PlanPlan
Split-DollarSplit-DollarCustodial Executive Custodial Executive
BonusBonusExecutive BonusExecutive Bonus
++
EMPLOYEREMPLOYERCONTROLCONTROL
--
Is Control Important?Is Control Important?
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Supplemental Executive Supplemental Executive Retirement Plan (SERP)Retirement Plan (SERP)
Golden Handcuffs
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SERP DefinedSERP Defined
“A contract between an employer and an employee to provide retirement and perhaps death and/or disability benefits to select employees”
Life insurance is purchased on the employee’s life to assist employer in meeting future
obligations
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SERPs Help Complete the SERPs Help Complete the Retirement PictureRetirement Picture
Soc. Sec.Investments
QRP
SERP
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PolicyBenefits
Premiums
Agreement
Retirement and/or
Disability $BusinessBusiness ExecutiveExecutive
Death Benefits
BeneficiarBeneficiaryy
Step1Step1
Step 2Step 2 Step 3Step 3
Step 4Step 4
Step 5Step 5
How it WorksHow it Works
Ins Co.Ins Co.
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AdvantagesAdvantages
Places “golden handcuffs” on key employees
Attracts the best of the best and gives key employees an incentive to stay
Flexible benefitsPick and choose participantsCorporation can recover its costsMinimal compliance issues
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SERPs and TaxesSERPs and Taxes
Tax Consequences
Today At Retirement
Employer No deduction Deductible
Employee No tax consequences Taxable income
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Accounting for Accounting for SERPsSERPs
Funding vehicle carried as asset on corporate books
Promise to pay benefits is a corporate liability
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Split-Dollar InsuranceSplit-Dollar Insurance
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Split-Dollar InsuranceSplit-Dollar Insurance
OwnershipBenefitsPremium
An insurance policy is “split” between the business and the
individual
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Split-Dollar ApplicationsSplit-Dollar Applications
Fringe benefitEstate liquidityBuy-sell planningGroup term replacement
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Split-DollarSplit-Dollar
…a versatile fringe benefit that permits the acquisition of needed life insurance at a reduced cost
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Premium SplitPremium Split
Employer
Employee
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Death Benefit Death Benefit SplitSplit
Employee’s Beneficiary
Employer
Split-dollar is also used to share policy cash value between an employer and an employee
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Choices!Choices!Economic Benefit Plan
Loan Plan
Policy Owner Employer EmployeeEmployee’s Cost Annual term value
of death benefitAnnual imputed interest income
Policy Cash Values
Employer owns entire cash value
Employee owns cash value exceeding employer’s premiums
Employer’s Share of Death Benefit
Greater of total premiums paid or policy cash value
Total premiums paid
Employee’s Share of Death Benefit
Balance of death benefit
Balance of death benefit
Cost Recovery When plan ends When plan ends
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Rollout at RetirementRollout at Retirement
Employer receives its premium payments back
Employee receives policy (minus employer’s premium)
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Tax ConsequencesTax Consequences
Employer: No deduction, but owns the cash value
Employee: Taxed on economic benefit and any
cash values received
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Retirement PlanningRetirement Planning
What have you done?
Could you do more?
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Would you be interested in tax-advantaged
retirement cash flow?
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Would you be interested in a plan where values
grow tax-deferred?
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Would you be interested in a plan that allows you to
exclude all of your employees?
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Would you be interested in a plan with minimal government rules or
regulations?
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Your PlanYour Plan
Utilizing the advantages of permanent life insurance
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Permanent Life InsurancePermanent Life Insurance
Policy cash values grow tax deferred
As long as the policy remains in force, withdrawals up to basis and loans are tax free
52 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Take Care of YOUR
Retirement Needs!
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Executive Bonus PlanExecutive Bonus Plan
Compensates select key employees using life insurance
Simple to install Costs of the plan are tax-deductible
54 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
How it WorksHow it Works
Business pays premium
Business receives current tax deduction
Insurance policy is purchased
BusinessExecutive
Income tax free Death benefit
Heirs
Ins Ins Co.Co.
Premium is taxable bonus
Executive owns policy
•Executive is taxed on bonus
• Cash values build tax-deferred (as long as policy stays in force)
•Policy cash values available for retirement or college funding
•Cash values may be creditor protected (varies by state)
•Death benefits may be used for estate settlement
55 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Executive Bonus PlanExecutive Bonus Plan
Tax Consequences
Today At Retirement
Employer Deductible Not applicable
Employee Taxable Income Tax–free
retirement income*
Under current tax law
56 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
How Custodial Executive How Custodial Executive Bonus WorksBonus Works
Business pays premium
Business receives tax deduction
Insurance policy is purchased
Business Executive
Income tax free death benefit
Heirs
Ins Ins Co.Co.
Premium is taxable bonus
•Cash values build tax-deferred (as long as policy stays in force)
•Accumulated cash value for retirement or college funding, subject to employer’s consent
•Cash values may be creditor protected (varies by state)
•Employer has “veto” power over executive’s access to policy cash values
Employer restricts executive’s ability to exercise ownership rights
Executive owns policy
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Buy-Sell PlanningBuy-Sell Planning
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Triggering EventsTriggering Events
DeathDisabilityRetirement
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Every Business Every Business Has Three ValuesHas Three Values
1. Going concern value2. Liquidation value3. Gone value
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AdvantagesAdvantages
Guarantees a buyerEstablishes estate tax value at death
Provides for fundingAllows a smooth transition
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You Want:You Want:
Top dollar for your businessPrompt settlementFixed estate tax value at deathRelief to family from business worries
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The Remaining The Remaining Owners WantOwners Want
Full control of businessMinimum payment for businessNo interference from deceased’s family members
Smooth & prompt transferContinuing line of business credit
63 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Don’t ignore the issues…Don’t ignore the issues…
or you’re sure to have a problem!
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Adopt A Buy-Sell Adopt A Buy-Sell Agreement And Fund ItAgreement And Fund It
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Funding MethodsFunding Methods
Personal funds of buyerSinking fundBorrowed fundsInstallment paymentsLife insurance
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Advantages of Advantages of Using Life InsuranceUsing Life Insurance
CertaintyIncome-tax-free proceeds at deathCash value availableCost efficient dollarsStrengthens credit
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Two Types of Buy-SellsTwo Types of Buy-Sells
1. Cross purchase
2. Stock redemption
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50 shares $250,000
A
50 shares $250,000
B
Life Insurance Company
B’s estateA
50 shares
$250,000
Premiums Premiums
Death proceeds$250,000
Cross-Purchase PlanCross-Purchase Plan
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BA
100 shares$200,000
Stock RedemptionStock Redemption
C
ABC Corp.300 shares outstanding
Valuation:$600,000
Life Insurance Company
premiums
death proceeds
A’s stock is retired by
corporation
$200,000death proceeds
100 shares$200,000
100 shares$200,000
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Business ValuationBusiness Valuation
Fair Market Value
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Plan now for the successful Plan now for the successful future of your businessfuture of your business
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Disability Income Disability Income InsuranceInsurance
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Your Most Valuable AssetYour Most Valuable Asset
Your ability to earn an income
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Disability Coverage TypesDisability Coverage Types
IndividualGroupBusiness overhead expenseDisability buyout
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Typical FeaturesTypical Features
Definition of disabilityPartial or residual disabilityCost of living adjustmentNon-cancelableGuaranteed renewableWaiting or elimination periodBenefit periods
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Taxation of Personally-Owned Taxation of Personally-Owned Disability Income Insurance Disability Income Insurance PoliciesPolicies
Premiums are not deductibleBenefits are income tax-free
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Employer-Paid PoliciesEmployer-Paid Policies
Employer deducts premiumPremiums are not taxable to employee
Benefits are included in employee’s income
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Disability Buy-OutDisability Buy-Out
Premiums not deductibleProceeds not treated as taxable income
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Qualified PlansQualified Plans
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FeaturesFeatures
Tax-deductible employer contributions
Maximum contribution amountsVesting schedulesDistributionsReporting & disclosure
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Defined Benefit Defined Benefit Pension PlansPension Plans
Retirement benefit is based on salary & length of service.
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Defined Contribution PlansDefined Contribution Plans
Money purchaseProfit sharing401(k)
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Other Qualified PlansOther Qualified Plans
412(i) Pension PlanTraditional IRARoth IRASIMPLE IRASimplified Employee Pension (SEP)Tax-sheltered Annuity (TSA)
84 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Group Term Life InsuranceGroup Term Life Insurance
Corporation deducts premiumsEmployees not taxed on the premiums unless coverage exceeds $50,000
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A Personal Estate Plan:A Personal Estate Plan:
Plan of DispositionPlan of Liquidation
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The Estate Tax The Estate Tax Roller CoasterRoller Coaster
Phase One (2009)Exemption amounts gradually increase Top tax rate gradually declines to 45%
Phase Two (2010)Estate tax repealed (for one year only)
Phase Three (2011+)Estate tax returns with $1 million
exemption and 55% top rate
87 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Estate Tax Estate Tax Exemption AmountsExemption Amounts
$0
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
$3,500,000
2009 2010 2011+
88 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Top Estate Tax RatesTop Estate Tax Rates
0%
10%
20%
30%
40%
50%
60%
2009 2010 2011+
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TTaaxxaabbllee EEssttaattee SSttaattee && FFeeddeerraall
EEssttaattee TTaaxxeess
TTaaxx aass %% ooff EEssttaattee**
$15,000,000 $10,000,000 $7,500,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000
$6,201,740 $3,512,180 $2,187,860
$890,380 $379,220 $182,000 $99,600
41% 35% 29% 18% 9% 6% 5%
*Combined federal and state taxes. Assumes a state death tax with a $1 million exemption.
The Estate Tax Bite in The Estate Tax Bite in 20092009
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Problems You’ll Encounter Problems You’ll Encounter as a Business Owneras a Business Owner
Estate taxes & expensesBusiness continuityBalancing interest of heirs
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Distribution to Heirs Distribution to Heirs Equally or EquitablyEqually or Equitably
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Partial SolutionsPartial Solutions
Minimize taxes through estate planning
Sell off part of business to pay taxes
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Complete Solutions:Complete Solutions:
Funded buy-sell planIrrevocable life insurance trust
Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
What do you have to What do you have to lose?lose?
Except all your hard work and your business
95 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Review: Planning StrategiesReview: Planning Strategies
Split-Dollar
Executive Bonus
Key Person
Non-qualified Retirement
Plans
Qualified Plans
Buy-Sell Agreement
Business Organization
Disability IncomeSERP
96 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Review: Planning ServicesReview: Planning Services
Financial Planning
Estate Planning
College Funding
Investments
Retirement Planning
Pension Administration
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