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For agent/registered representative use only. Not for public distribution. ©2014 Voya Services Company. All rights reserved. CN0822-12003-0915

Increasing flexibility for Buy-Sell planning

The “Own Your Own Policy” Buy-Sell Arrangement

Presenter Name, TitleAdvanced Sales Team


Disclosures

The Voya™ Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently, and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation.

These materials are not intended to and cannot be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor.

Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya™ family of companies.

All guarantees are based on the financial strength and claims paying ability of the issuing insurance company who is solely responsible for all obligations under its policies.

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Objectives: What we will cover today

Elements of Buy-Sell Agreements

Potential for “Own Your Own Policy” approach

Potential for marketing OYOP Buy-Sell Arrangements

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Elements of successful Buy-Sell

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A successful buy-sell arrangement has TWO components:

Written (& legally binding) agreement

Funding

One without the other is a recipe for disaster


Buy-Sell Agreement

A Buy-Sell Agreement is a:

Legally binding contract

Between the parties

For buying and selling a business

At a set or formula price

That takes place at a triggering event (i.e., death, disability, retirement)

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Life Insurance is often used to fund buy-sell arrangements:

Death proceeds received are typically income tax free*

Cash immediately available to purchase a deceased owner’s interest

No financial strain on the buyer at the time of the purchase

Policy cash values can be used as a down payment in the event of a disability or lifetime buyout**

Funding the Plan

* Proceeds from an insurance policy are generally income tax free and if properly structured, may also be free from estate tax.

** Loans and withdrawals may generate an income tax liability, reduce available cash value and reduce the death benefit or cause the policy to lapse.

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Buy-Sell Agreement

Two basic types:

Entity Redemption(Stock redemption in corporate situations)

Cross Purchase(Including “wait & see,” “no-sell” and trustee arrangements)

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Entity Redemption

An agreement that the business itself will purchase a departing owner’s business interest at a specified or ascertainable price.

When life insurance is used, the business purchases a policy on the life of each of the owners covered by the buy-sell arrangement.

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Entity Redemption

Results: All remaining owners increase ownership on a pro-rata basis

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Entity Redemption

Potential advantages:

Simplicity

Where life insurance is used for funding:

– One policy per owner

– The business pays insurance premiums

– Policy’s cash value is an asset on the business balance sheet

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Potential disadvantages: Loss of Basis “Step-Up”

Corporate AMT

– Applies to C corps or LLC’s taxed as C corps

Increase in value of entity for Estate Taxation

– Importance of written/enforceable agreement

Entity Redemption

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Cross-Purchase

An agreement among business owners to collectively purchase the interest of a departing owner at a specified or ascertainable price.

When life insurance is used, each owner purchases a policy on the life of each of the other owners covered by the buy-sell arrangement

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Cross-Purchase

Results:

Selected owners increase ownership per Agreement

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Cross-Purchase

Potential advantages:

Flexible terms (can decide who should be next generation of owners)

No loss of basis “step-up”

No corporate AMT

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Cross-Purchase

Potential disadvantages: Complexity

Where life insurance is used for funding:

– Personal after-tax funds used to pay policy premiums

– Possible disproportional premium payments

– Potential administrative complexities

– Multiple policies needed for each owner

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Policy Ownership

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One thing common with nearly all buy-sell arrangements:

The insured business owner does not own the policy insuring

his/her life!


Owners who do not own their own policies:

Are precluded from making decisions on policies

May not be able to acquire ownership of policy if they leave business

May have difficulty purchasing personal coverage after leaving business (due to health or cost)

Potential challenges of not owning policy

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For agent/registered representative use only. Not for public distribution. ©2014 Voya Services Company. All rights reserved. CN0822-12003-0915 18

Owners who own their own policies:

Have personal control of policies on their lives

Can use the same policies for personal death benefit coverage

Can potentially use the policies for supplemental retirement income

Can take the policy with them when they leave the business

Potential advantages to owning policies


In an Own Your Own Policy (“OYOP”) Buy-Sell Arrangement, the insured business owner purchases his or her own life insurance policy and assigns all or a portion of the death benefit to those obligated to purchase his or her business interest.

The Own Your Own Policy Buy-sell


1. Someone else has the obligation to purchase the Owner’s business interest

Other business owners or the business entity

Reasons personal ownership not used


1. Someone else has the obligation to purchase the Owner’s business interest

Other business owners or the business entity

2. The potential impact of the “Transfer for Value” Rule [IRC 101(a)(2)]

If this rule is violated, then death benefits are subject to income taxes

Reasons personal ownership not used


The Transfer for Value Rule

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Basic Rule:

Death benefits from life insurance are received income tax-free [IRC § 101(a)(1)]

Transfer for Value:

Death benefits are not income tax-free where there has been “a transfer for valuable consideration, by assignment or otherwise, of a life insurance contract or any interest therein” [IRC § 101(a)(2)]


There is:

Assignment of death benefit to co-owner or to business entity

Of an interest in a life insurance contract

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Is there a Transfer for Value in OYOP?


Is there a Transfer for Value in OYOP?

But is there valuable consideration?

Valuable consideration is not limited to cash or assets

Valuable consideration can include an exchange of promises

The OYOP Buy-Sell exchanges the assignment of policy death benefits for promises to buy a departing owner's interest in the business

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Question

Can I use an OYOP buy-sell arrangement without

violating the transfer for value rule?


Exceptions to the Transfer for Value Rule

The Transfer for Value Rule has five exceptions [IRC § 101(a)(2)]:

1. Transferor’s Basis

2. Transfer to the Insured

3. Transfer to a Partner of the Insured

4. Transfer to a Partnership in which the Insured is a Partner

5. Transfer to a Corporation in which the Insured is a Shareholder or Officer

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Three exceptions available to OYOP

Potentially Applicable Transfer for Value Exceptions:

1. Transfer to a Partner of the Insured

2. Transfer to a Partnership in which the Insured is a Partner

3. Transfer to a Corporation in which the Insured is a Shareholder or Officer

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Types of OYOP buy-sell arrangements

OYOP Cross Purchase Buy-Sell– Available only if the business is a partnership (or an LLC taxed as

a partnership) TFV Exception: Transfer to a Partner of the Insured

OYOP Entity Redemption Buy-Sell– Available to partnerships (& LLCs taxed as partnerships)

TFV Exception: Transfer to a Partnership in which the Insured is a Partner

– Available to C corporations and S corporations (& LLCs taxed as corporations) TFV Exception: Transfer to a corporation in which the Insured is a

Shareholder or Officer

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Implementing the OYOP buy-sell

Cross Purchase1. Owners enter into Cross Purchase agreement

2. Each Owner purchases and pays premiums on a policy on his/her own life

3. Each Owner assigns part of death benefit to other owners according to obligations under agreement

4. At an insured Owner’s death, death benefits paid out according to policy assignments & beneficiary designations

5. At an insured Owner’s departure from business Remaining Owners may use cash values from their own policies to buy

out departing Owner’s interest Owners release assignments against departing Owner’s policy

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Implementing the OYOP buy-sell

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Entity Redemption1. Owners and the business enter Entity Redemption arrangement

2. Each Owner purchases and pays premiums on a policy on his/her own life

3. Each Owner assigns part of death benefit to the business according to the agreement

4. At an insured Owner’s death, death benefits paid out according to policy assignment & beneficiary designations

5. At an insured Owner’s departure from the business Other assets may be used to buy out Owner’s interest Business releases assignment on policy


OYOP has potential to increase sales

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1. Door opener It’s a unique idea which will be

attractive to many business owners and which they probably haven’t considered before

– Share with Tax & Legal Advisors (use Voya’s White Paper)

– Share with Clients



1. Door opener

2. It increases your chances of selling cash value life insurance Most buy-sell sales are term insurance sales because the owners

may not see themselves staying with the business past retirement age (cannot take policy with them in typical buy-sell arrangement)

Policy can serve “double duty” as accumulation vehicle for supplemental retirement income

Or if death benefits will be needed for wealth transfer planning after an Owner leaves the business, the policy needs to stay in force until the Owner dies

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1. Door opener

2. It increases your chances of selling cash value life insurance

3. Potentially increases the amount of death benefit the Owner will buy because the buy-sell coverage can be combined with personal coverage

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Voya OYOP marketing materials

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Thank you! For questions regarding Voya Life Companies’ insurance products, please call: 866-464-7355

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