business owner insurance planning by mark simon
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TRANSCRIPT
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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
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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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3 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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4 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Benefits For All Employees:Benefits For All Employees:
Qualified pension plansGroup life and health
insurance
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5 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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6 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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7 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Tax-Deductibilityis only one factor to be
considered
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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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9 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Income Tax RatesIncome Tax Rates
Affect business planning
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10 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Personal Tax Bracket vs.Personal Tax Bracket vs.Corporate Tax BracketCorporate Tax Bracket
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11 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Benefit Planning Benefit Planning Key Questions:Key Questions:
1. Is it deductible?
2. Who controls benefit values?
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12 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
What is Most What is Most Important to You?Important to You?
Tax-deductibilityor
Control of benefit
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13 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Types of BusinessTypes of Business
Sole proprietorshipPartnershipC corporationS corporationProfessional corporationLimited liability company (LLC)
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14 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Sole ProprietorshipSole Proprietorship
A business owned entirely by one person
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15 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
PartnershipPartnership
An association of two or more persons as co-owners of a business for profit
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16 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
CorporationCorporation
A separate legal entity apart from its owners
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17 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
S Corporations Enjoy:S Corporations Enjoy:
Limited liabilityEmployee benefit advantages (for non-shareholders)
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18 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
S CorporationS Corporation
Taxed like a partnership
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19 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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
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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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21 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Choosing the Form of Choosing the Form of Business OrganizationBusiness Organization
TaxationLimited liabilityEmployee benefits
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Key Person InsuranceKey Person Insurance
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23 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Who is a Key Person?Who is a Key Person?
High salary levelDecision-making powerAbility to implement plansFinancial leverageSpecial talent
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24 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
ProblemsProblems
Disruption of managementReduction in earningsImpairment of creditLoss of confidenceReplacement costs
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25 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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26 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Adopt A Adopt A Corporate Resolution Corporate Resolution
Why?To fully protect
your business
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Executive Executive Fringe BenefitsFringe Benefits
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28 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Supplemental Supplemental Executive Retirement Executive Retirement PlanPlan
Split-DollarSplit-DollarCustodial Executive Custodial Executive
BonusBonusExecutive BonusExecutive Bonus
++
EMPLOYEREMPLOYERCONTROLCONTROL
--
Is Control Important?Is Control Important?
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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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30 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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31 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
SERPs Help Complete the SERPs Help Complete the Retirement PictureRetirement Picture
Soc. Sec.Investments
QRP
SERP
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32 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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33 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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34 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
SERPs and TaxesSERPs and Taxes
Tax Consequences
Today At Retirement
Employer No deduction Deductible
Employee No tax consequences Taxable income
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35 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Accounting for Accounting for SERPsSERPs
Funding vehicle carried as asset on corporate books
Promise to pay benefits is a corporate liability
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Split-Dollar InsuranceSplit-Dollar Insurance
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37 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Split-Dollar InsuranceSplit-Dollar Insurance
OwnershipBenefitsPremium
An insurance policy is “split” between the business and the
individual
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38 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Split-Dollar ApplicationsSplit-Dollar Applications
Fringe benefitEstate liquidityBuy-sell planningGroup term replacement
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39 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Split-DollarSplit-Dollar
…a versatile fringe benefit that permits the acquisition of needed life insurance at a reduced cost
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40 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Premium SplitPremium Split
Employer
Employee
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41 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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42 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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43 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Rollout at RetirementRollout at Retirement
Employer receives its premium payments back
Employee receives policy (minus employer’s premium)
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44 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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45 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Retirement PlanningRetirement Planning
What have you done?
Could you do more?
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46 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Would you be interested in tax-advantaged
retirement cash flow?
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47 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Would you be interested in a plan where values
grow tax-deferred?
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48 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Would you be interested in a plan that allows you to
exclude all of your employees?
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49 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Would you be interested in a plan with minimal government rules or
regulations?
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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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51 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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
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52 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Take Care of YOUR
Retirement Needs!
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53 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Executive Bonus PlanExecutive Bonus Plan
Compensates select key employees using life insurance
Simple to install Costs of the plan are tax-deductible
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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
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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
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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
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Buy-Sell PlanningBuy-Sell Planning
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58 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Triggering EventsTriggering Events
DeathDisabilityRetirement
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59 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Every Business Every Business Has Three ValuesHas Three Values
1. Going concern value2. Liquidation value3. Gone value
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60 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
AdvantagesAdvantages
Guarantees a buyerEstablishes estate tax value at death
Provides for fundingAllows a smooth transition
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61 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
You Want:You Want:
Top dollar for your businessPrompt settlementFixed estate tax value at deathRelief to family from business worries
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62 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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
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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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64 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Adopt A Buy-Sell Adopt A Buy-Sell Agreement And Fund ItAgreement And Fund It
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65 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Funding MethodsFunding Methods
Personal funds of buyerSinking fundBorrowed fundsInstallment paymentsLife insurance
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66 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Advantages of Advantages of Using Life InsuranceUsing Life Insurance
CertaintyIncome-tax-free proceeds at deathCash value availableCost efficient dollarsStrengthens credit
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67 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Two Types of Buy-SellsTwo Types of Buy-Sells
1. Cross purchase
2. Stock redemption
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68 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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69 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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70 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Business ValuationBusiness Valuation
Fair Market Value
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71 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Plan now for the successful Plan now for the successful future of your businessfuture of your business
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Disability Income Disability Income InsuranceInsurance
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73 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Your Most Valuable AssetYour Most Valuable Asset
Your ability to earn an income
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74 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Disability Coverage TypesDisability Coverage Types
IndividualGroupBusiness overhead expenseDisability buyout
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75 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Typical FeaturesTypical Features
Definition of disabilityPartial or residual disabilityCost of living adjustmentNon-cancelableGuaranteed renewableWaiting or elimination periodBenefit periods
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76 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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77 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Employer-Paid PoliciesEmployer-Paid Policies
Employer deducts premiumPremiums are not taxable to employee
Benefits are included in employee’s income
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78 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Disability Buy-OutDisability Buy-Out
Premiums not deductibleProceeds not treated as taxable income
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Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Qualified PlansQualified Plans
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80 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
FeaturesFeatures
Tax-deductible employer contributions
Maximum contribution amountsVesting schedulesDistributionsReporting & disclosure
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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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82 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Defined Contribution PlansDefined Contribution Plans
Money purchaseProfit sharing401(k)
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83 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Other Qualified PlansOther Qualified Plans
412(i) Pension PlanTraditional IRARoth IRASIMPLE IRASimplified Employee Pension (SEP)Tax-sheltered Annuity (TSA)
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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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85 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
A Personal Estate Plan:A Personal Estate Plan:
Plan of DispositionPlan of Liquidation
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86 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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
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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+
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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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89 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
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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90 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Problems You’ll Encounter Problems You’ll Encounter as a Business Owneras a Business Owner
Estate taxes & expensesBusiness continuityBalancing interest of heirs
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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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92 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Partial SolutionsPartial Solutions
Minimize taxes through estate planning
Sell off part of business to pay taxes
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93 Copyright 2009, The Ohio National Life Insurance CompanyD-0223_01-09
Complete Solutions:Complete Solutions:
Funded buy-sell planIrrevocable life insurance trust
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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
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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
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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