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Business Planning Strategies
The successful business ownerStrategies for effective business planning
A Reference Guide for Business Owners
Contents 1 | Know what it takes to build a successful business 2 | Attract and retain key employees 5 | Protect the business you have worked so hard to build 8 | Cross Purchase Buy-Sell Agreements 9 | Entity Buy-Sell Agreements
The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.
NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION • NOT FDIC OR NCUA INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY •
NOT GUARANTEED BY ANY BANK OR CREDIT UNION
1
Ask yourself these important questions:• DoIknowwhatwillhappentomybusinesswhen
Iretire?
• Ismybusinesscapableofcontinuingitssuccess
intheeventofmyormypartner’suntimelydeath
or disability?
• Ismyfamilyadequatelyprotectedifsomething
weretohappento me?
• HaveIdoneeverythingIcantoattract,retain
andrewardthekeyemployeesthatarecriticalto
mybusiness?
Ifyouanswered“no”toanyofthesequestions,youmaywant
toconsiderimplementingaformalbusinessplanningstrategy.
Properplanningcanhelpyouprotectyourbusiness,attract
andretainkeyemployees,andhelpensurethatyourbusiness
transfersinthemannerthatyouchoose.
Take the steps necessary to protect your most valuable assetsStartbyexploringallyourprotectionoptions.Thendevelopa
long-termstrategythatcanhelpprotectthecontinuityofyour
businessifyou,apartner,orkeyemployeedecidestoretireor
leavethebusiness,becomesdisabled,ordiesunexpectedly.
MassachusettsMutualLifeInsuranceCompany
(MassMutual)understandstheneedsoftoday’sbusiness
owners–wehavebeenworkingwithbusinessownersfor
over160years.Ourfinancialprofessionalswilltakethe
timetolisten,learnaboutyouandyourenterprise,andhelp
youdevelopstrategiesthatarebestsuitedtoyourneeds.
Considertheinformationonthefollowingpagesandtalkto
yourMassMutualfinancialprofessionalabouthelpingyou
designastrategythatmayprotectandensurethecontinued
successofyourbusiness.
Know what it takes to build a successful business
It takes vision, preparation, skills and desire – not to mention a focused dedication to achieving your goals. If you are like most business owners, you have worked hard and made many sacrifices to grow your business. That is why you should put just as much energy into protecting it as you did building it.
2
Intoday’shighlycompetitiveexecutivemarketplace,itis
becomingincreasinglymoredifficulttoattractandretaintop
talent.Salaryisnolongertheonlycompensationdriver.These
astuteindividualsalsolookatanemployer’soverallbenefits
packageanditspotentialtohelpaddresstheirrealconcernsof
financiallyprotectingtheirfamilies,inadditiontoadequately
planningforretirement.Theseconcernsareheightenedby
ever-changingtaxlaws,pensionplanuncertainties,andSocial
Securityshortfalls.Thegoodnewsisyoucanofferinsurance
andretirementbenefitsthatcanmakeadifferenceforboth
yourexecutivesandyourbusiness.*
Youprobablyalreadyhaveastandardbenefitspackage
inplace–onethatincludesmedicalanddentalcoverage,
disabilityincomeinsurance,andaretirementplan.However,
yourcompetitorsmorethanlikelyofferasimilarbenefits
package.Thesedays,employeesarelookingforspecial
benefitplansaboveandbeyondthestandardpackagesmost
employersalreadyoffer.Thesebenefitsoftenprovidethe
primaryincentiveforkeyemployeestojoinandremain
loyaltoyourcompany.
Thefollowingdescribessomeincentivebenefitplansthat
youcanoffertoyourkeyemployees.Whattheyallhavein
commonistheirabilitytoattractandretainkeypeople.In
addition,theymayevenbeofbenefittothemostimportant
personinthebusiness–you!
Nonqualified Deferred Compensation Plans (NQDC)NQDCPlansaredesignedtoprovideextraretirementbenefits
forkeyemployeesaboveandbeyondwhatcanbeprovided
withqualifiedpension,profitsharing,or401(k)plans.You
canchoosewhichemployeesaretobecovered,theamount
ofbenefittobeprovided,andwhetherthebenefitissubject
toavestingschedule.Infact,youcanusethistypeofplan
justlikeitisusedbylarge,publicly-ownedcorporations–to
rewardandattractemployeeswith“goldenhandcuffs.”
NQDC Plans are ideally suited to employers that:
• Wanttoprovideadditionalretirementincometo
select,highly-compensatedemployees;
• Haveastable,maturecorporationthatislikelytobe
inexistencetopaytheretirementand/ordeathbenefit
aspromisedbytheNQDCPlan;and
• Havekeyemployeeswhohavemaximized
contributionstotheirqualifiedretirementplans.
Theseplanscanbe,andoftenare,supportedbylife
insurancethatispaidforandownedbythebusiness.Life
insuranceprovidesadeathbenefitandcanbeasafewayto
provideincometokeyemployees.Overtime,itcanprovide
livingbenefitsfromtheaccumulatedcashvalueandcanbe
aneffectivewaytoprovidesupplementalretirementincome1
fortheemployee,whilethedeathbenefitcanbepaidtothe
employee’sfamilywhentheindividualdies.Inaddition,the
plancanbestructuredsothatyourecoverthepremiumsyou
paidintothepolicy(requiresahigherdeathbenefitamount).
Attract and retain key employees
* There may be implications under the Employment Retirement Income Security Act (ERISA) depending on how certain types of insurance policies are made available to employees and whether such an arrangement constitutes an “employee benefit plan” under ERISA. Employers should consult their own tax and legal advisors for further information on potential ERISA implications.
1 Distributions under the policy (including cash dividends and partial/full surrenders) are subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
3
Theretirementbenefitordeathbenefitistaxdeductibleto
thecompanywhenpaidoutandtaxabletotheemployee
orhisorherfamilywhenpaidoutasasalarycontinuation
retirementbenefit.
Split Dollar PlansSplitDollarPlansareacost-andtax-effectivemethodof
providingmultiplebenefitsusinglifeinsurance.SplitDollar
getsitsnamebecauseitinvolvessplittingthebenefitsofalife
insurancepolicybetweenyouandyourkeyemployee.Here
ishowittypicallyworks:
• Youpaythepremiums.
• Therearetwotypesofownership:
– Endorsement: Youarethepurchaserandowner
ofthepolicyandthereisanagreementbetween
youandtheinsuredemployeethatdefinesthe
portionofthepolicydeathbenefitthatwillbe
paidtotheemployee’sbeneficiary.
– Collateral Assignment:Youremployee
purchasesthepolicyandistheownerofthe
policy.Theemployeethenmakesacollateral
assignmentofthepolicytoyouinreturnfor
youpayingallofthepolicypremiums.
• Youareentitledtoallofthepolicy’scashvalue.2
• Whentheemployeedies,youcanrecoupthe
premiumsyoupaidintothepolicyorreceive
anamountequaltothetotalcashvaluethathas
accumulatedinthepolicy,whicheverisgreater.
• Thebalanceofthedeathbenefitisgenerallypaid
totheemployee’sbeneficiary.
2 Cash value is a feature of permanent life insurance.
Alternatively,thearrangementcanbestructuredasaSplit
Dollarloaninwhichyoulendtotheemployeealloraportion
oftheannualpremium.Youareentitledtothecashvalueor
deathbenefitequaltotheoutstandingloanamount.
ASplitDollarPlanistaxeffectivefortheemployee.
Insteadofpayingfullpremiumswithafter-taxdollars,
theemployee’sannualcostislimitedtoataxableeconomic
benefitbasedontheemployee’sshareofthedeathbenefit.
Inaddition,thedeathproceedsreceivedbytheemployee’s
beneficiaryaregenerallyincometaxfree.
4
Retirement Contribution ProtectionIfyou,yourpartners,oremployeesbecometotallydisabled
beforereachingretirementage,eachofyoumaynotonly
loseyourabilitytoearnanincome,butalsotheopportunity
toaccumulateadditionalfundsforretirement.MassMutual
canhelpaddressthisneed.
RetireGuard®canhelpreplaceanamountequaltothe
retirementplancontributions(includingboththeemployee’s
andthebusiness’scontributions)thatwouldhavebeenmade
toaneligibledefinedcontributionplaniftheparticipant
hadnotbecomedisabled.Itisnotaretirementplanora
substitutionforone.Duringaperiodoftotaldisability,
MassMutualwillpaybenefitsintoanirrevocabletrustthat
offersdifferentinvestmentoptionstohelpmeetthatperson’s
retirementgoals.
Executive (Section 162) Bonus PlansAnExecutive,orSection162,BonusPlanisatypeof
incentiveplanwherebythebusinessprovidesanexecutive
withfundsthatareusedtopurchasealifeinsurance
policyownedbytheemployee.Yourbusinesspaysthe
lifeinsurancepremiumdirectlyorindirectlythrougha
salarybonus.Youcanchoosewhichemployeesreceivethis
incentive,buttheemployeeownsallofthepolicy’scash
valueandhe/shechoosesthebeneficiary.Thereareoptional
arrangementsthatcanrestricttheemployee’saccesstothe
cashvaluesuntilretirement.
Executive Bonus Plans are recommended when:
• Akeyemployeehasaneedforlifeinsurance;
• Youarelookingforadditionaltaxdeductions;and
• Youwanttoprovidekeyemployeeswithabenefit
inadditiontoaqualifiedretirementplan.
Thebonusamountyoupayisfullytaxdeductibletothecompany,
providedthisisconsideredreasonablecompensation,andtaxed
asordinaryincometotheemployee.Youhavetheoptiontowork
outanarrangementwiththeemployee,suchasofferingaloan,to
helpcovertheincometaxliability.
5
Youhavebuiltyourbusinesswiththehopethatitwill
withstandthetestoftime.Unfortunatelytherearealot
ofelementsoutofyourcontrolthatcanaffectthesuccess
ofyourbusiness,suchasanunstableeconomy,alackof
consumerspending,andincreasedcompetition.
Thinkaboutwhatwouldhappentoyourbusinessifyou,your
businesspartner,orakeyemployeeweretounexpectedly
dieorbecometoosickorinjuredtowork.Thereisnodoubt
thatthiswouldhaveahugeimpactonyourbusinessandits
continuedsuccess.Butthereisgoodnews:thisissomething
youcanplanfor.
Thefollowingaresomecommonbusinessplanning
strategiesdesignedtoprotectyourbusiness.Justasyou
wouldinsureyourbusinessproperty,youshouldalso
considerinsuringthepeoplewhomakethebiggest
impactonyourcompany’ssuccess.
Key Person InsuranceKeypersoninsurancecanhelpofferpeaceofmindin
knowingthatthefinancialstabilityofyourbusinessis
protectedintheeventofavaluedemployee’suntimelydeath.
Basically,youpurchasealifeinsurancepolicytocover
thelifeofthatindividual,namingyourbusinessasthe
beneficiary.Ifthekeyemployeedies,thepolicyproceeds
arepaidbacktothebusinesstohelpkeepitgoingwhile
youseektofillthevoidleftbythedeceasedemployee.
Thisarrangementisideallysuitedforbusinesseswith:
• Owners,partnersorexecutivesthathaveadirect
impactoncompanyearnings;
• Salespeoplewhocontinuallyexceedgoalsorhave
relationshipswithimportantclients;and
• Individualswhohavespecializedskillsortechnical
knowledgethatcannoteasilybereplaced.
Premiumsforkeypersoninsurancearenottaxdeductible
sincethebusinessisthebeneficiaryofthedeathbenefit.
Proceedsaretypicallyexemptfromfederalincometax,
however,deathbenefitproceedsmaybesubjecttothe
corporateAlternativeMinimumTax(AMT)ifyour
businessisstructuredasacorporation.
Qualified Sick Pay Plan (QSPP)AQualifiedSickPayPlansetscompanypolicybeforean
employeedisabilityoccurs.Itestablisheswhotopay,how
muchtopay,whentostartpayments,andhowlongtopay.
Theplanmustbeinstitutedpriortoanemployeebecoming
disabledandtheemployeemustbeawareofthetermsofthe
plan.Itmustalsobeinwritingandtheboardofdirectorsor
partnershipmusthavearesolutionadoptingtheplan.
YoucanfundyourQSPPwithadisabilityincomeinsurance
policyissuedoneachemployeetobecovered,whichallows
youtoavoidhavingtopaydisabilitybenefitsoutofyour
company’sassets.Thistransferstherisktotheinsurance
carrier.Theinsurancecompanydetermineseligibilityfor
benefitpayments,processestheclaims,andprovidesall
insuredbenefits.Thisalsoenablesyoutobudgetforthe
disabilitywhileyouandyouremployeesarehealthyandto
deductthepremiumasanecessarybusinessexpense.
Protect the business you have worked so hard to build
6
Individual Disability Income InsuranceDisabilityincomeinsuranceprovidesmonthlybenefitsto
helpyouasabusinessownerandyouremployeesmaintain
theirstandardoflivingwhileunabletoworkduetoillness
orinjury.Premiumdiscountsmaybeavailableforbusinesses
withthreeormoreemployees.3
Supplemental Disability Income InsuranceAsabusinessowner,youhavetheoptionofproviding
youremployeeswiththeopportunitytoapplyfor(or
decline)supplementaldisabilityincomeinsuranceon
eitheravoluntaryoremployer-paidbasis.Supplemental
disabilityincomeinsurancesupplementsyourexisting
grouplong-termdisabilityincomeinsurance(LTD),
helpingtoreducethegapbetweenLTDbenefitsandyour
employees’pre-disabilityincome.Supplementaldisability
incomeinsurancecanhelpyouremployeesmeettheir
incomeprotectionneeds.Inaddition,offeringsupplemental
disabilityincomeinsurancehelpsattractandretainquality
employeesandexecutivesbyaddingtoyourofferings.
InsurancecanbeofferedonaGuaranteedStandardIssue
(GSI)basisforbusinesseswith10ormoreeligibleemployees
foremployer-paidcoverage(75ormoreeligibleemployees
forvoluntarycoverage).GSIprovideseligibleemployees
theopportunitytoapplyforanindividualdisabilityincome
(IDI)insurancepolicywithsimplifiedunderwriting.Ifan
eligibleemployee4hasbeenactivelyatworkforatleast90
days,isnotcurrentlydisabledorreceivingdisabilitybenefits,
hasnotbeenhospitalized,isaU.S.citizenorpermanent
residentvisaholderlivingandworkingintheU.S.,and
financiallyqualifies,MassMutualguaranteestoofferanIDI
insurancepolicywithaspecificmaximummonthlybenefit
amount,waitingperiod(eliminationperiodinCA),and
benefitperiodatstandardratestothatemployee.
Business Overhead Expense (BOE) Abusinessoverheadexpensedisabilityinsurancepolicy
reimbursesbusinessownersforexistingoverheadexpenses
incurredwhiletheyaredisabled,keepingthecompanyup
andrunningwhiletheownerrecovers.Regularexpenses
thatcouldbecoveredunderaBOEpolicyincludeemployee
salaries,rent,leases,andutilitiestonameafew.And,BOE
premiumsaregenerallytaxdeductibleasabusinessexpense.
Buy-Sell AgreementsIntheeventofabusinessowner’sdeathordisability,a
Buy-SellAgreementwilldefinethetermsofthebuyout
oftheowner’sinterestinthebusiness.Byestablishinga
Buy-SellAgreement,youcanhelpensureasmoothtransition
ofownership,withminimaldisruptiontotheday-to-day
activitiesofthebusiness.
AneffectiveBuy-SellAgreementmustestablish:
• Whowillpurchasethedecedent’sordisabled
owner’sshareofthebusiness;
• Atwhatpricethedecedent’sheirsorestatewill
selltheshare;and
• Whenthesalewilltakeplaceandhowitwill
befunded.
Lifeanddisabilityincomeinsurancecanbeusedtofund
theBuy-SellAgreement.Ineithercase,thetotalamountof
insuranceshouldapproximatetheanticipatedpurchaseprice
oftheinsured’sshareofthebusiness.
3 Discounts subject to underwriter approval and state availability.4 MassMutual may establish additional eligibility requirements for a GSI offer.
7
Ina Cross Purchase Buy-Sell Planeachbusinessowner
purchasesalifeordisabilityinsurancepolicycoveringthe
lifeofeveryotherowner.Eachbusinessownerpaysthe
premiumsandisthebeneficiaryofthepoliciesthathe/she
ispurchasing.Ifanownerdies,thesurvivingownersuse
thelifeinsurancedeathbenefittopurchasethedeceased
owner’sinterest.Ifanownerbecomesdisabled,theBuy-Sell
Agreementprovidesanagreeduponpaymenttothedisabled
ownerforhisorherinterestinthebusiness.
InanEntity/Stock Redemption Buy-Sell Planthebusiness
purchasesalifeordisabilityinsurancepolicycoveringeach
owner.Thebusinesspaysthepolicypremiumsandisthe
beneficiaryoneachpolicy.Ifoneoftheownersdies,the
deathbenefitfromhis/herpolicyispaidtothebusinessto
purchasethatowner’sinterestinthecompany.Ifanowner
becomesdisabled,theBuy-SellAgreementprovidesan
agreed-uponpaymenttothedisabledownerforhisorher
interestinthebusiness.
Thechartsonthefollowingpagesprovidesomeguidance
tohelpyoudeterminewhichBuy-SellPlanmaybemost
suitableforyourbusiness.
8
Cross Purchase Buy-Sell Agreements
Cross Purchase Buy-Sell Agreements
EACH OWNER purchases a life or disability insurance policy covering every other owner.
Business
· Premiums paid personally by each individual owner are not tax deductible.
· A Split Dollar Plan or Executive Bonus might be used for the business to pay the premiums.
Business
· Owners may use a “trusteed” Cross Purchase Agreement. – The trustee acquires and owns life or disability insurance on each owner, reducing the number of policies
to the number of owners. – In the event of death, the trustee collects the life insurance policy proceeds, pays the proceeds to the
deceased owner’s estate, and transfers the deceased owner’s shares to the surviving owners in the appropriate proportions.
– In the event of disability, a Buy-Sell Agreement provides an agreed-upon payment to the disabled owner for his or her interest in the business.
Deceased owner’s estate
· Generally, the proceeds from a life insurance policy paid to a deceased business owner’s estate for his/her interest will be income tax free.
· The policy owned by the decedent on the lives of the other owners may be purchased or surrendered.
Surviving owners
· Policy proceeds are generally received income tax free, subject to rules regarding transfer of policies for a valuable consideration.
EACH OWNER pays the premium on the policies.
Massachusetts Mutual Life Insurance Company underwrites the policy application and, if approved, issues the life or disability income insurance contract.
· Each business owner owns a policy on the other business owners. • The policyowner is the beneficiary.
How it works
Tax considerations
Advantages
9
Entity Buy-Sell Agreements
5 Death proceeds from life insurance contracts owned directly or indirectly by an employer insuring the lives of its employees are taxable to the employer unless certain notice and consent requirements are met. See IRC Section 101(j).
6 Distributions under the policy (including cash dividends and partial/full surrenders) are subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Entity Buy-Sell Agreements
BUSINESS purchases a life or disability insurance policy covering each owner.
Business
· Premiums are not tax deductible, but the death or disability proceeds are generally exempt from federal income tax. (Note: Some C corporations may be subject to corporate Alternative Minimum Tax on a portion of the proceeds.)
· If a corporate stock redemption agreement is used, there is generally no increase in basis for a surviving owner’s interest (surviving owners of S corporations, partnerships, and LLCs can obtain a partial or full step-up). This differs from a Cross Purchase Buy-Sell Agreement.
Business
· Cash values in life insurance policies are available as reserve funds for the business entity.6
· This type of Buy-Sell Agreement is preferable when there are many business owners (business owns just one policy for each owner) or when there is a wide range of ages among business owners (in other types of Buy-Sell Agreements, younger owners pay higher premiums on the policy of an older owner).
· Establishing a price for the business in a Buy-Sell Agreement among owners who are not related may fix the value for federal estate tax purposes.
· If a death or a disability of a partner occurs, the policy proceeds are paid to the business and are generally income tax free.
Insured
· There is no tax implication. · Generally, the redemption of the
decedent’s business interest is income tax free to his/her estate or heirs. However, redemption of stock may be taxed as a dividend in certain family-owned cases.
BUSINESS pays the premiums.
Massachusetts Mutual Life Insurance Company underwrites the policy application and, if approved, issues the life or disability income insurance contract.
· The business entity is the policyowner. • The business entity is the beneficiary.
How it works5
Tax considerations
Advantages
Insurance products are issued by Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001.
RetireGuard can be issued on a stand-alone basis or as a rider on a disability income contract for an additional cost. Benefits are not paid into an employer-sponsored retirement plan. When insured with RetireGuard, during a period of total disability, MassMutual will pay benefits into an irrevocable trust. The trust offers different investment options so that a client can select the option that best meets his/her retirement goals. Trust assets may be tax-deferred depending on the investment option(s) selected. Trust services provided by The MassMutual Trust Company, FSB, a wholly-owned subsidiary of MassMutual. Not all policies and riders are available in all states. This policy is issued by Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. This policy has exclusions and limitations. For costs and complete details of coverage call your agent or MassMutual at 1-800-272-2216 for a referral to an agent.
LI8502 1013 CRN201511-176609
© 2013 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com. MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.
There are many reasons to choose a life insurance company to help meet your financial needs: protection for your family or business, products to provide supplemental income and the confidence of knowing you will be prepared for the future.
At Massachusetts Mutual Life Insurance Company (MassMutual), we operate for the benefit of our participating policyowners. We stand strong in the fundamental belief that every secure future begins with a good decision. And when choosing a life insurance company – ownership, strength and stability matter.
Learn more at www.massmutual.com/mutuality
MassMutual. We’ll help you get there.®