You've spent a lifetime building your business.
Take a moment to make sure that your hard
work will survive the death of you or one
of your partners.

As the owner of a closely-held business,
much of your wealth is probably tied up
in the business. While returning earned
income back into the business helps finance
growth, it can cause severe liquidity problems
for your estate when you die. After paying
probate and estate taxes, your estate and
surviving family members also may encounter
liabilities that become payable upon your
death. They may also face the potential
of decreased business earnings, due to your
absence.

There are ways to overcome these liquidity
problems. Business-oriented planning tools
can help reduce estate taxes and make the
best use of the cash available. The most
common business estate-planning tools are
buy-sell agreements, Section 303 stock redemptions,
Section 6166 estate tax deferrals and the
qualified family-owned business exclusion.
Business-owned life insurance can be used
to fund each of these planning methods.
 

Buy-Sell Agreements

Buy-sell agreements can establish the value
of your business for estate-tax purposes
and improve your estate's liquidity by assuring
a ready market for your business upon your
death. These agreements also protect business
partners from sharing ownership with a deceased
stockholder's family.

There are two main forms of buy-sell agreements:
cross-purchase and stock redemption. In
an insurance-funded cross-purchase arrangement,
each business owner buys an insurance policy
on the other, naming themselves as beneficiary.
At the death of one of the owners, the surviving
owner receives tax-free insurance proceeds
to use in purchasing the deceased owner's
stock from his or her estate.

In an insurance-funded stock-redemption
arrangement, the corporation purchases the
stock of a deceased shareholder. Here the
business is the owner and beneficiary of
life insurance policies on each shareholder.
A partnership looking for a business continuation
plan may use a similar arrangement called
an entity purchase.

A buy-sell agreement that is funded with
life insurance will benefit:

Your Family:
 

• Prevents conflict with surviving owners
  
   
• Ensures that your family receives
  a fair price for your business
   
• May set the value of your business
  for estate-tax purposes
   
• Provides needed cash
   

Your Business:
 

• Keeps new and/or unwanted owners
  out of the business
   
• Prevents disputes
   
• Ensures continuity and orderly transfer
  of ownership
   
• May provide tax-free cash to purchase
  stock
   

Section 303 Redemptions

Section 303 of the Internal Revenue
Code gives your estate a one-time opportunity
to remove cash or other property from
your business, at little or no tax cost,
through a partial redemption of your
stock. This can provide the liquidity
your survivors need to pay funeral costs,
estate and administrative expenses,
and state and federal death taxes.

To be eligible for a Section 303 redemption,
the stock value must exceed 35 percent
of your estate. The maximum amount that
can be paid under such a plan equals
the total amount of the federal estate
tax, state death taxes, funeral and
administrative expenses. Corporate-owned
life insurance can be used to fund the
redemption. Under this arrangement,
your business purchases an insurance
policy on your life and at your death
uses the tax-free proceeds to buy enough
stock from your estate to cover death
expenses and taxes.

Section 6166

An estate tax burden can force the
liquidation of a closely-held business.
Internal Revenue Code Section 6166 was
designed to prevent this liquidation.
If the business interest constitutes
more than 35 percent of your adjusted
gross estate, under Section 6166 the
executor may elect to pay the estate
tax attributable to the value of the
business in 10 annual installments,
beginning no later than five years after
the date of your death.

There are a number of requirements
you'd have to meet to be eligible for
the Section 6166 extension. If your
estate qualifies, life insurance offers
an economical way to pay these installments.
 

Qualified Family-Owned Business
Exclusion

If your business qualifies as "family
owned," you may be able to exclude part
of it from estate taxation. The amount
you can exclude is $675,000 if the death
of the estate owner occurs in 1998.
That qualifying amount gradually decreases
over time to $300,000 if the death occurs
in the year 2006 or later. Your business
qualifies as family owned if the business
comprises more than 50% of your total
estate and you pass the estate on to
a "qualified heir." A qualified heir
is generally defined as a spouse, child,
grandchild or other descendent. Your
heirs, however, should realize that
they have to hang onto the business
for at least 10 years following such
an estate transfer. If they don't, they
may have to pay the full estate taxes
that were avoided. Life insurance can
provide your heirs with the cash necessary
to pay estate taxes whether or not you
qualify for this exclusion.

Business Valuation for Estate Planning


No matter what technique you select
for your company, determining the value
of the business is a key step in the
estate planning process. Why? First,
in the case of a buy-sell agreement,
you need to know the value of the business
to determine the price and fund the
agreement. Second, because the business
is part of your estate, the valuation
is needed to estimate the estate taxes;
this helps you calculate the cash or
liquidity needed to administer the estate.
Finally, the value of the business must
be reported on the estate tax return
when the owner dies.

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to Business Solutions

Business continuation
planning:

Prepare for the continued success of
your business after you're gone.

Business continuation planning tools
can help you avoid the problems that
can occur when a business owner dies.
A life insurance funded business continuation
plan provides a wide variety of benefits
for your family and the business.

For your family:
 

• Prevents conflict with surviving
  owners
   
• Assures a fair price for the business
  
   
• May set the value of your business
  for federal estate tax purposes
   
• Can provide cash for your estate
  
   

 

For the business:
 

• Allows you to maintain control
  of the business
   
• Prevents disputes
   
• Assures orderly transfer of
  the business upon death
   
• Provides an income tax-free
  death benefit to purchase shares
  of the business
   

 

Several business continuation
plans are available:

Cross Purchase Plan

An agreement between co-owners
of a business. Surviving owners
purchase pro rata shares of the
deceased owner's stock from the
estate. To fund the purchase, each
stockholder owns, pays premium on
and is the beneficiary of an appropriate
amount of life insurance on the
other owners.

Stock Redemption/Entity Purchase
Plan

The business becomes obligated
to purchase the stock or partnership
share of a deceased shareholder
or partner. The business owns, pays
premium on and is the beneficiary
of life insurance on each shareholder
or partner.

LifeCycle Buy-Sell

Combines the benefits of the traditional
stock redemption and cross purchase
methods. Provides several benefits,
including the ability to supplement
retirement income and allocate the
premiums as desired.

Section 303 Stock Redemption
Plan

A special type of stock redemption
plan that can provide cash to the
estate of a deceased shareholder
in a tax-favored manner. Allows
a corporation to redeem a deceased
shareholder's stock without incurring
income taxable dividends. The potential
for dividend taxation upon a






 

Business Solutions

To run a successful business, you need to understand
the financial choices available to business owners. At
our firm, we apply our expertise, resources and tools to
find long-term solutions that can help your business grow
and succeed.

• Business planning:
  The key to protecting your business and your net worth.
  

 

Business Continuation

 

• Key Person Life
  Insurance: Protect your business against
  the loss of key people.
  
• Business estate
  planning: How to preserve your life's work.
  
• Business continuation:Planning
  for your business after you're gone.
  

 

Benefits for key executives

 

• Executive
  Bonus Plans:How to reward key employees.
  
• The Golden
  Executive Bonus Agreement: Protecting
  key employees with life insurance.
  
• Life Rewards:
  Providing retirement benefits for key employees.
  

Planning for changes in ownership

 

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Top

 

Planning for changes in ownership

You can prepare for the problems that can come
with a change in ownership by using these techniques:

 

Buy-Sell agreements This is the most common
business continuation planning tool. Life insurance
funds the agreement, which establishes the value
of your business and assures a ready market for
your share in the business after you're gone.

Key Employee
Life Insurance

Provides you with the funds you need to keep your
business running smoothly when you lose a key employee.

Personal estate planning

Carefully incorporating your business needs into
a total estate plan can help you meet estate tax
and liquidity needs to preserve the full value of
your business for your family and associates.

 

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Business Solutions

Business Planning

Develop a strategy to preserve your business and
your net worth

Effective business continuation is both an "art"
and a science. First and foremost, it is an art.
Because the best business plan always considers
your unique financial goals and objectives, creativity
and customization is required to select and tailor
those strategies best suited to meet your specific
business continuation and benefit needs.

However, business continuation and benefit planning
is also a science. The best business plan should
take into account the tax and legal ramifications
of the various financial strategies adopted.
A Financial Advisor or Registered Representative
will incorporate both the art and science of business
planning in a program recommended to you.

Using business dollars for personal
expenses

These valuable concepts can help:

Split-dollar life insurance

Your corporation can help you pay for your own
life insurance by "advancing" your money to pay
the annual premium. This low-cost benefit can also
be available for key employees.

Disability insurance

Your business can provide you with personal disability
insurance — which continues a portion of your salary
when you're unable to work — and the premiums (in
most cases) are tax deductible.

Section 303 stock redemption

Your business may be able to help you pay estate
taxes and settlement costs if your stock is worth
more than 35 percent of your adjusted gross estate.
Under a Section 303 stock redemption, the business
redeems some stock from your estate to produce cash
to meet your estate's obligations.

How to use employee benefits to
increase income and improve retention of key employees

These concepts can help you get the most out of
your benefit dollars:

Disability salary continuation planning

A salary continuation plan can help protect you,
your key employees and your business from the financial
consequences of a disability. If the plan is funded
with disability insurance policies, premium payments
are considered tax deductible as a necessary business
expense.

Qualified pension and profit-sharing plans

Employee-sponsored retirement programs help employees
prepare for retirement and allow them to take advantage
of special tax breaks. Any contributions you make
to the plan are tax deductible.

Life Rewards

Highly compensated executives are limited in the
amounts they can save for retirement in qualified
plans. Nonqualified plans are available through
Life Rewards and allow associates to enhance their
retirement benefits.

Split-Dollar insurance

Life insurance can be provided to select executives
at a reduced cost through split-dollar insurance
plans.

Golden Executive
Bonus Arrangement(GEBA)

GEBA and other executive bonus strategies provide
life insurance to employees and give your company
a current income tax deduction.

Personal financial analysis

This service helps employees manage their money
more effectively and achieve their personal financial
goals.

Group insurance

Your business can provide a variety of programs,
and the tax deductions generated by the premiums
you pay make the cost of these benefits even lower.
Medical, disability and life insurance are the three
most sought-after programs.

The Art and Science of Business Planning can help
ensure the ongoing success of your business.

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Business Solutions

Key Person Insurance:

Protect your business against the loss of one of
your most vital assets: key employees

Key people are vital to the success of your business.
A Key Person Life Insurance Plan can provide the
funds you need to keep your business running smoothly
after you've lost a key employee through death or
employee turnover.

How Key Person Life Insurance works:

The employer pays premiums for a life insurance
policy on the key employee's life. The employer
is the owner and beneficiary.

The employer can arrange an Exchange of Insurance
Agreement to reduce losses if a key employee leaves
prior to retirement. This allows the employer to
transfer coverage to a successor.

If a key employee dies, the employer receives the
policy's income tax-free death benefit* and can
apply it towards business expenses or losses caused
by the employee's death.

If you employ anyone whose sudden, unexpected absence
would significantly impact your business, consult
with your life insurance agent and financial professionals
about Key Person Life Insurance.

* Subject to the corporate alternative minimum
tax for C corporations.

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Business Solutions

Life Rewards:

Select nonqualified retirement benefits for your
key executives

The benefit program your company offers is critical
to attracting and retaining top employees. Qualified
benefit programs — pension and 401(k) plans — limit
participation by highly compensated executives.
A nonqualified plan is a unique benefit designed
to attract and reward top executives. Life Rewards,
a customized nonqualified benefit program, can strengthen
the tie between your company and its top executives.

You can provide Life Rewards for your key executives
to:
 

• Secure the services of your most influential
  executives that may impact profitability.
   
• Attract new managers.
   
• Build loyalty in today's high turnover marketplace.
  
   
• Provide a second tier of benefits to highly
  compensated executives disadvantaged by qualified
  plan limitations.
   

 

Three Life Rewards strategies are available:

Executive Deferral Plan

Allows the executive to defer a portion of base
salary, bonus or commissions, which lowers currently
taxable income.

Deferred Bonus Plan

Restricted solely to discretionary employer contributions
and rewards the executive subject to a vesting
schedule you select.

Executive Salary Continuation Plan

Protects against inflation to help your valued
executives achieve a comfortable retirement. Funded
entirely with company dollars.

Life Rewards offer valuable benefits to key executives:

 

• Lower currently taxable income during their
  working years
   
• A survivor benefit for their family
   
• Tax deferred growth of retirement assets
  
   
• Parity for executives limited by qualified
  plan restrictions
   

 

Who can sponsor a nonqualified Life Rewards
plan?

Any company can establish a nonqualified Life
Rewards plan. C corporations best complement
the tax advantages of a nonqualified plan; however,
nonshareholders of an S corporation also benefit.
Other entities such as a limited liability company,
limited liability partnership, sole proprietorship
or partnership may also sponsor a nonqualified
plan for select nonowner executives.

Life insurance?

Life insurance is the most commonly used informal
funding vehicle for nonqualified benefits because
of the death benefit it provides and its tax-advantaged
status. Your company will be the owner and beneficiary
of the life insurance policy, which insures
the executive participant in the plan.

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Golden Executive Bonus Arrangement
(GEBA):

A compensation tool designed to reward select
executives with cash value life insurance

Attracting, motivating and retaining key executives
takes a competitive compensation package that
includes more than a salary and a bonus. Until
recently, government regulations made it almost
impossible to single out and reward those employees
you value most.

The Golden Executive Bonus Arrangement (GEBA)
can be a solution for rewarding and retaining
your most valued executives. This tool gives
your company a current income tax deduction
through the purchase of cash value life insurance,
while maintaining control to encourage an executive
to stay with your company.

Other advantages of life insurance funded GEBA
include:
 

• You decide who participates
   
• You can tailor it to the needs of each
  executive
   
• It is income tax-deductible for your company
  
   
• You can adjust the benefit to meet your
  future needs
   
• It is easy to get started
   

 

If you're looking for an executive compensation
tool that helps you retain one or more key
executives, consider using life insurance
in a GEBA.

Return
to Business Solutions

Business estate planning:


How to preserve your life's work
 

You've spent a lifetime building your business.
Take a moment to make sure that your hard
work will survive the death of you or one
of your partners.

As the owner of a closely-held business,
much of your wealth is probably tied up
in the business. While returning earned
income back into the business helps finance
growth, it can cause severe liquidity problems
for your estate when you die. After paying
probate and estate taxes, your estate and
surviving fa