Blog #22: My Daughter Will Be Running My Business

(Presentations were created using the InsMark Illustration System.)

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Bob Ritter's Blog #22 my daughter will be running my business C Corporations image

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Note from Bob Ritter: This Blog can obviously apply to other family members, but as a father of five girls, I couldn’t resist framing it with a daughter.

This analysis involves business succession from Dad-to-Daughter, deductible liquidity for the business, income for Mom, and tax free retirement cash flow for Dad. That’s a mouthful, I know, but it really works that way.

Assume that Dad, a key executive of a closely-held C Corporation, age 45, is also the 100% stockholder of the Corporation. Dad and Mom have an adult daughter, age 26, who will operate the business after her father’s death.

Because Dad is also a key executive of the business, the Corporation will experience a financial loss at his death. Also assume that Mom will have a continuing need for income after his death.

One way to meet the cash needs of the Corporation and the income needs of Mom is to have the Corporation own a life insurance policy on Dad that pays sufficient death proceeds to provide for the needs of the Corporation and Mom.

This is a common recommendation of many advisers; however, this corporate-owned life insurance approach presents the following three problems:

  1. Key executive life insurance premiums are not deductible;
  2. Mom inherits paper stock with limited non-deductible dividends the only source of income from that stock;
  3. Corporate alternative minimum tax of 15% could be imposed on any policy death proceeds.

Alternate Key Executive Insurance Technique

There is a better way to meet the cash needs of the Corporation and the income needs of Mom by using a planning strategy known as the Alternate Key Executive Insurance Technique. Following are the steps for implementing this arrangement:

  1. Dad owns the life insurance policy with Mom as beneficiary.
  2. The Corporation bonuses Dad an amount sufficient to pay the premiums due on the policy each year. This bonus is taxable as compensation and is deductible by the Corporation as an ordinary and necessary business expense.
  3. Dad borrows funds from the policy to pay the tax on the bonus.
    Note: This is identical to the “Free Dog” arrangement we described in Blog #2. Some life insurance companies allow policy loans in the first year. In this event, loans to cover the income tax on the bonus should be illustrated starting in year 1. From a cash flow perspective, loans starting in year 2 (the most common carrier option) should generally be satisfactory due to the delay between when the bonus is paid and the income tax is due.
  4. Dad (and, by extension, Mom) has personal access to policy cash values for tax free retirement cash flow.
  5. At Dad’s death, the proceeds are sheltered from estate taxes by the unlimited marital deduction. Mom collects the life insurance proceeds and loans it to the Corporation at a fair market rate of interest using a demand loan agreement. This gives the Corporation the liquidity it needs to continue business operations. If the parties desire, the Corporation may assign corporate assets as security for the loan.
  6. Mom still receives all the stock of the Corporation from Dad’s estate and is now 100% owner of the Corporation. The stock transferred to Mom is sheltered from estate taxes at Dad’s death by the unlimited marital deduction.
  7. The Corporation provides an income stream to Mom by paying her the interest due on the loan each year, keeping the principal loan amount intact. (The interest is deductible to the Corporation as interest expense.)
  8. At Mom’s death, the Corporation either pays back the loan principal to her estate, which is then distributed to their children or, if the Corporation still needs the money, the loan receivable can be transferred to the children (with the Corporation then making loan repayments to the children over time).

C Corporation Summary

The Alternate Key Executive Insurance Technique permits the family to achieve its objectives of having cash to continue business operations at the death of Dad, providing income by way of loan interest to Mom that is deductible to the Corporation, and avoiding the corporate alternative minimum tax on the life insurance death benefit. The strategy also provides Dad with tax free loans from the policy to fund both the income tax on the bonuses used for premium and supplemental retirement income.

Click here to see an illustration of a policy insuring the key executive/shareholder using this strategy.

Documents On A Disk Legal Documents imageDocumentation for the Alternate Key Executive Insurance Technique is also available in InsMark’s Documents On A Disk™ in the Key Employee Insurance Plans section of specimen documents. A variation with superb tax results is also provided in that same section in which an irrevocable trust is owner and beneficiary of the life insurance.

Note re S Corporations and Limited Liability Companies: If the business is an S Corporation or a Limited Liability Company where the business will experience a financial loss at the death of a key owner, the same procedure could be used for the owner to meet the cash needs of the business and the spouse. Exception: The bonus for premium and policy loans to cover the income tax on the bonus would not be efficient with these “pass-through” firms. The cash value from a personally-owned policy would be, however, a terrific source of personal, after tax, retirement cash flow, and the policy death proceeds paid to the spouse could be used as a source of needed loans to the business with income to the spouse by way of loan interest likely well in excess of what might otherwise be personally available. This same procedure would work with the irrevocable trust variation noted above with premiums gifted to the trust by the parents.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

The illustration module for the policy associated with the Alternate Key Executive Insurance Technique is the Executive Security Plan on the Executive Benefits tab in the InsMark Illustration System. For a license to use this System, contact Julie Nayeri at julien@insmark.com or (888) InsMark (467-6275). Institutional inquiries should be directed to David A. Grant, Senior Vice President – Sales at (925) 543-0513 or dag@insmark.com.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog22.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

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More Recent Articles:

Blog #21: Equity Rescue Made Easy

Blog #20: Could Your Case Be Going Down The Drain?

Blog #19: How to Solve the Toughest Part of Your Business

Blog #18: Premium Financing Meets Wealthy And Wise®

Blog #17: CheckMate Selling®

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #21: Equity Rescue Made Easy

(Presentations were created using the InsMark Illustration System and Wealthy and Wise®.)

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Can Indexed Universal Life (IUL) compete with an equity account? In some ways, it’s an apples vs. oranges comparison in view of the equity account’s potential for gain in excess of the participation cap of the IUL. On the other hand, the downside protection against loss of IUL gives it a competitive advantage, and for some clients, this is an overwhelming plus.

Let’s just compare them using the same interest rate, say, 7.50%. We’ll also credit the equity account with a 1.00% dividend since IUL typically excludes dividends from the crediting rate of the selected index. (Some companies may offer this feature, but I am unaware of any.) As you will see, the IUL outperforms the equity account by a wide margin.

The reason for this is the significant difference in the items that retard the growth of the equity account vs. those that impact the IUL.

Equity Account Limitations:

  • Management fees;
  • Income tax on dividends;
  • Income tax on realized short term gains;
  • Capital gains tax on realized long-term gains;
  • Turnover: Income tax and/or capital gains tax.

Indexed Universal Life Limitations:

  • Haircut on the index used;
  • No credit for a dividend;
  • Mortality charges.

Case Study

Tom and Anne Murray are both age 45. Among other assets, they have an equity account currently valued at $250,000 with a cost basis of $200,000. They are interested in acquiring more life insurance on Tom’s life for the protection of their three children and are evaluating IUL as an appropriate policy.

Tom and Anne intend to use the equity account to supplement their retirement income. Their adviser suggests using the equity account as a source of premiums for the IUL and accessing the IUL cash value to enhance retirement cash flow. They want to examine this strategy.

To establish the premium pattern for the IUL, we used a calculator in our Wealthy and Wise® System to determine the level amount of after tax cash flow that could flow from the $250,000 equity account. We directed the calculator to deplete the account over five years taking into account the limitations noted above. (With so many moving parts to the equity account, this calculator is a valuable tool should you want to duplicate the logic of this Blog.)

Wealthy and Wise Equity Calculator Prompt

Bob Ritter's Blog #21 Wealthy and Wise Equity Calculator withdraw funds image

This calculator is located on the Equity Account sub-tab located on the Liquid Assets tab. See the Equity Assets (Details) report for the year-by-year calculations. Similar calculators are available for all Liquid Assets.

The calculator determined the equity account could produce $53,304 a year for five years (after tax) which we will use to fund the IUL. Starting at age 65, they will begin accessing cash flow from the IUL.

Below is a graphic of the IUL results over 50 years (Source: Illustration of Values module in the InsMark Illustration System):

Bob Ritter's Blog #21 IUL graphic from InsMark Illustration System software

Click here to review the entire IUL illustration. Pay particular attention to Pages 2 and 3 where after tax retirement cash flow of $50,000 a year is illustrated (withdrawals to basis; loans thereafter). Note also that a substantial amount of death benefit is available in all years, a feature not associated with the equity account.

The next step is to compare the IUL with continuing the equity account with the identical after tax cash flow of $50,000 a year from each Strategy starting at their age 65. For this, I used Wealthy and Wise, and below are the graphics from that System showing the comparisons of net worth and death benefit.

Net Worth Comparison

(After Providing $50,000 a Year in After Tax Retirement
Cash Flow from Both the Equity Account and the IUL)

Bob Ritter's Blog #21 net worth graph image

Death Benefit Comparison

(After Providing $50,000 a Year in After Tax Retirement Cash Fl w from Both the Equity Account and the IUL)

Bob Ritter's Blog #21 wealth to heirs graph image

Equity rescue? You bet it is!

Click here to review the Wealthy and Wise reports.

A Wealthy and Wise case typically requires input of all a client’s financial information. This is not the case with an Equity Rescue Plan (or an Annuity Rescue Plan as described in Blog #10). Both can be illustrated with minimal data input. An ancillary benefit is that it gives you a platform to discuss other planning opportunities with what is likely to be a very impressed client.

Conclusion

A well-designed Equity Rescue Plan can produce very dramatic results. Click here for a testimonial from one of our licensees.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

For a license to use and InsMark System, contact Julie Nayeri at InsMark at julien@insmark.com or (888) InsMark (467-6275). Institutional inquiries should be made to David A. Grant, Senior Vice President – Sales at (925) 543-0513 or dag@insmark.com.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

Digital Workbook Files For This Blog

Blog21.zip

Download all workbook files for all blogs

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

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More Recent Articles:

Blog #20: Could Your Case Be Going Down The Drain?

Blog #19: How to Solve the Toughest Part of Your Business

Blog #18: Premium Financing Meets Wealthy And Wise®

Blog #17: CheckMate Selling®

Blog #16: What Do Your Clients Think About You?

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #20: Could Your Case Be Going Down The Drain?

(There are no InsMark presentations used in this blog.  It is a an informational blog only)

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Here’s a solution for those times when a seriously interested prospect says something like this: “I really like your presentation, but I want to have my [attorney] [CPA] [tax adviser] look it over.”

At this point, if you don’t know the adviser, are you concerned your case might be going down the drain?

There is an email that you may be able to get your prospect to write that puts you on equal footing with the adviser. Here it is (be sure you are listed as receiving a copy):

Dear [attorney] [CPA] [tax adviser],

I’m in the process of analyzing a presentation made by [your full name].

I want your input on it. Consider this email as authorization for you to make this study with [your first name].

Please keep each other informed on any separate aspects of the evaluation as I would prefer having you both in agreement prior to either of you getting back to me with your conclusions. If alternatives appear to apply, by all means, I’d like you both to explore them.

If your billing for this project exceeds $[2,500], please contact me.

Thank you.

[Name of Client]

Note:  The dollar value in the fourth paragraph varies based on the nature of the evaluation.

It’s important to stress with your client that you need to be involved in the presentation to the adviser. Once this has been accomplished, present a sample copy of the letter or email and ask:

“I need some sort of authorization for your adviser. Does this wording look OK?” If so, be sure to get a copy.

This technique doesn’t always work – but when it does, it goes a long way toward saving your case.

InsMark’s Referral Resources

If you would like assistance with any InsMark illustration, contact any of the Referral Resources listed below.  All are InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software and can help you using your choice of insurance company.  Mention my name when you talk to one of our Referral Resources as they have promised to take special care of my readers.

seperator image

More Recent Articles:

Blog #19: How to Solve the Toughest Part of Your Business

Blog #18: Premium Financing Meets Wealthy And Wise®

Blog #17: CheckMate Selling®

Blog #16: What Do Your Clients Think About You?

Blog #15: How to Take Money Out of a Business Without Paying Taxes on It — Legally

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive