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Transamerica Occidental Life Insurance Company (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica's interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of November 2004.
Planning Your Company’s Future • Are you taking the right steps to make sure your business can survive the retirement, disability, or death of an owner or key employee?
Planning Your Company’s Future • Without adequate planning, your business may be negatively impacted or forced to close in a relatively short period of time. • Why? Not because you did something wrong, but because you did nothing.
Business Succession Planning • A crucial step to help ensure the successful transfer of your company or business interests. • Helps assure that funds will be available to help provide maximum financial flexibility in the event of retirement, death, disability, or if you leave the business.
Key Person Coverage • How long would it take to replace your key person(s) and how much business does your company stand to lose during the transition? • An insurance policy on the key person’s life, where the business is the owner and beneficiary, may help cover the cost of the transition.
Buy-Sell Planning Agreement • A written guide to help you through your business succession planning. • Can help mitigate conflict and speed up the transition.
What is a Buy-Sell Agreement? • A legally binding contract that can be used with all types of businesses (must be drafted by an attorney). • Stipulates that at death, retirement, disability, or other withdrawal of a principal, his or her share of the business must be sold to the remaining partners, shareholders, or the business itself.
What is a Buy-Sell Agreement? • Remaining partners, shareholders, or the business itself must purchase portion of business owned by the deceased, retired, disabled, or withdrawing principal. • Life insurance may be purchased to help fund agreement at death or retirement.
Key Provisions of a Buy-Sell Agreement • The Buy-Sell Agreement specifies: • Owner will not dispose of their ownership interest during their lifetime without first offering it for sale to other owners. • Who will be selling and who will be buying. It is mandatory for the seller to sell and for the buyer to buy.
Key Provisions of a Buy-Sell Agreement • The Buy-Sell Agreement specifies: • A purchase price based upon a pre-established formula to be used at the time of death in order to determine a definitive price for the ownership interests. • Which state laws apply. • Changes/termination of agreement. Process to update coverage should be established and valid reasons to terminate agreement should be stated.
Business Valuation • Oftentimes, owner has no idea what the business is actually worth. • Most business owners over- or undervalue their business by at least 50%. • Without proper valuation, owner’s financial plan may not meet owner’s needs at time of major event, such as sale of business, divorce, or death of owner. • Regular business valuation can determine current market value of business. • Valuation is crucial factor in determining individual’s net worth and life insurance needs.
Types of Buy-Sell Agreements – Cross Purchase • Calls for each business principal to purchase a proportionate share of each other’s interest in business. • Each principal purchases a life insurance policy on each of the other business principals. • Issues to consider.
Cross Purchase Policy Owner & Beneficiary on Owner B’s Life Premium Premium Policy Owner & Beneficiary on Owner A’s Life Owner A Life Insurance Policy Owner B
Types of Buy-Sell Agreements – Stock Redemption • Business (instead of individual) agrees to purchase stock from business principal(s). • Corporation owns life insurance policy on principals. • Issues to consider.
Stock Redemption Stock Redemption Buy-Sell Agreement Stock Redemption Buy-Sell Agreement Business Premium Policy Owner & Beneficiary of Policies on Owners’ Lives Owner B Owner A Life Insurance Policy
Types of Buy-Sell Agreements – Wait-and-See • Possible solution to changing tax laws, business needs, as well as personal issues. • Actual purchaser of deceased principal’s ownership interest and respective amounts not determined until death of business principal.
Wait-and-See Buy-Sell Agreement 1st Option Buy-Sell Agreement 1st Option Business Buy-Sell Agreement 2nd Option Owner B Owner A Or Premium Premium Policy Owner & Beneficiary on Owner A’s Life Policy Owner & Beneficiary on Owner B’s Life Life Insurance Policy
Protecting the Business • Business has first option to purchase interest. • If business does not exercise option, owners have option to purchase interest. • If owners do not exercise option to purchase interest, business must purchase interest.
Minimize Risk • Help protect yourself and your business from economic loss and increase the likelihood of success. • Reduce risk of loss at the death of a key person or at the time of business transfer. • Plan to retain control of business and assure the funds will be available to provide financial flexibility.
