BUSINESS CONTINUATION STRATEGIES using life insurance

1. BUSINESS CONTINUATION STRATEGIES using life insurance An introduction to small-business owners Buy-Sell Agreements PPT-262 1/2014

2. Agenda • Why business continuation planning? • Buy-sell agreements • Cross-purchase agreements • Entity purchase agreements Before we begin This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. We encourage you to consult your tax advisor or attorney.

3. 1 • Why business continuation planning?

4. Why business succession planning? Try answering the following questions: • What will happen to your business when you retire? • Do you have a business successor lined up and ready to take over? • Will your entire business or a share of your business need to be sold? • Do you already have buyer and what is the price? • What if you died today? • What would be the consequences to your business partners, employees, customers, debtors, creditors, and most importantly, your family and beneficiaries? • The LOSS OF A • VITAL EMPLOYEE can have a • much more CATASTROPHIC IMPACT on the survival of a small company than a large one.1 1”Small World, Trends in the U.S. Small Business Market,” LIMRA, 2013. This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that Allianz Life Insurance Company of North America, its affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.

5. Potential pitfalls survivors may face after the death of a business owner

6. How can life insurance fit into business succession planning? • A death benefit provided by life insurance can be a vital part of your business succession planning and employee retention. • Fixed indexed universal life (FIUL) insurance can also help while providing potential tax advantages. Some common uses of life insurance in business succession planning

7. The death benefit is the main reason for purchasing life insurance • It passes income-tax-free to the beneficiaries and can be used for: • Income replacement for primary wage earners • Business succession • Mortgage and other debts • Estate tax coverage • Small businesses REQUIRE MULTIPLE TYPES OF FINANCIAL PROTECTION including: • Personal coverage for the business owner • Financial safeguards for the business • Insurance and retirement benefits for the employees1 Source: 1“Small World: Trends in the U.S. Small Business Market, LIMRA, 2013.

8. HOW FIULWORKS MAXIMUM PREMIUM Cash value may be accessed via POLICYLOANSAND WITHDRAWALS1 Any available CASH VALUE Has the potential to GROW as more premium is paid Pays POLICY PREMIUMS Minimum premium POLICY FEES & CHARGES Fees & charges used to fundDEATH BENEFIT TO BENEFICIARIESAND OTHER VARIOUS EXPENSES POLICYHOLDER Policy loans and withdrawals will reduce the available cash value and death benefit and may cause the policy to lapse, or affect guarantees against lapse. Additional premium payments may be required to keep the policy in force. In the event of a lapse, outstanding policy loans in excess of unrecovered cost basis will be subject to ordinary income tax. Tax laws are subject to change and your clients should consult a tax professional.

9. 2 • Buy-sell agreements

10. Buy-sell agreements funded with life insurance • A BUY-SELL Agreement • is the legal contract obligating the sale and purchase of the business.

11. Buy-sell agreements funded with life insurance • Why have one? • Control disposition of business • Guarantee a buyer • Predetermine the price • Set value for federal estate tax • Assure creditors of continuation • Provide money to fund at exact time needed • Fairly treat non-business family members BUY-SELL AGREEMENTS CAN PLAY A VITAL PART in a business continuation strategy.

12. 3 • Cross-purchase agreement

13. Cross-purchase buy-sell agreements • The agreement is between the business owners. • Hypothetical example:1ABC Corp. • Three equal owners (Andy, Bobbie, and Carla) • If one owner dies, the two surviving owners will purchase the deceased’s business from his estate with the death benefit • Andy owns life insurance policies on Bobbie and Carla • Bobbie owns life insurance policies on Andy and Carla • Carla owns life insurance policies on Andy and Bobbie 1Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

14. Cross-purchase agreement hypothetical example • If CARLA dies: • Andy and Bobbie use the death benefit from their life insurance policies on Carla’s life to buy out her interest in the corporation. • Andy and Bobbie now each own 50% of ABC Corp. Carla’s ESTATE Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients. Andy’s $50,000 insurance proceeds Bobbie’s $50,000 insurance proceeds

15. Cross-purchase agreements Cross-purchase agreements • Some ADVANTAGES: • Owners own and control the policies • Surviving owner(s) purchase the business using the death benefit proceeds and has a cost basis equal to the purchase price • Avoids corporate Alternative Minimum Tax (AMT) for C corporations • Flexibility in how much of the business each owner purchases • Some ADDITIONAL CONSIDERATIONS: • Can become more complex when there are more than two owners • N(N-1) policies are required • N = number of owners • Example: 3 owners need 3(3-1) or 6 policies • Owners purchase the life insurance policies so they need the money to do so

16. Cross-purchase agreements Potential tax consequences of a cross-purchase agreement • To BUSINESS: • No income tax ramifications • Agreement is among the owners • Life insurance purchased personally • To BUSINESS OWNERS: • Insurance premiums are not income-tax-deductible • Death benefit is generally income-tax-free • Transfer for value problems could tax the death benefit • Deceased business owner has purchase value generally included in their taxable estate

17. 4 • Entity purchase agreements

18. Entity purchase agreement hypothetical example • The agreement is between thebusiness and the owner(s). • Hypothetical example:1ABC Corp. • Three owners: Andy, Bobbie, and Carla • ABC, Inc. purchases three life insurance policies on Andy, Bobbie, and Carla • The business and owners set up an agreement by working with their attorney, that if one owner dies, the business will purchase the deceased’s business from his/her estate 1Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

19. Entity purchase agreement hypothetical example • If CARLA dies: • The death benefit on Carla would be paid to ABC Corp. • ABC Inc. would use the death benefit to pay to Carla’s estate to buy her business interest • ABC would receive Carla’s share of the business • Andy and Bobbie now each own 50% of ABC Corp., Inc. kkkkkkk $100,000 death benefit Sells her portion of shares kkkk Andy Carla’s ESTATE Bobbie Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.

20. Entity purchase agreements • Some ADVANTAGES: • Simple to understand and arrange • Fewer policies required • Business pays premium • Business owned policy could be used for other purposes such as: • Key employee • Nonqualified deferred comp • Some ADDITIONAL CONSIDERATIONS: • Employer owned life insurance (EOLI) rules require signed notice and consent from the insured before a policy is issued.¹ • Cost of life insurance needs to be considered in this strategy ¹An employer owned life insurance policy may be subject to the requirements of Internal Revenue Code 101(j) in order to obtain an income tax free death benefit. In general those rules require that before the policy is issued, the employer must provide the insured with a written notice of the life insurance and obtain a written consent from the insured. Consult with an attorney for application of those rules to a specific situation.

21. Potential tax consequences • To the business: • Business cannot deduct the premium from income taxes • EOLI rules apply to obtain a tax-free death benefit¹ • C corporations: Corporate AMT may apply to subject cash value growth and/or death benefit to income taxation • To the business owners: • No taxable impact to them – business owns the policies • Deceased shareholder includes the purchase price of the business in their taxable estate • Surviving owners are not involved in the purchase – no cost basis change/increase for them ¹An employer owned life insurance policy may be subject to the requirements of Internal Revenue Code 101(j) in order to obtain an income-tax-free death benefit. In general those rules require that before the policy is issued, the employer must provide the insured with a written notice of the life insurance and obtain a written consent from the insured. Consult with an attorney for application of those rules to a specific situation.

22. The next step Work with your team of professionals to see if fixed index universal life insurance can help with your business-planning strategies.

23. DisclosuresAllianz Life Insurance Company of North America (Allianz) • Guarantees are backed by the financial strength and claims-paying ability of Allianz Life Insurance Company of North America. • The Employee Retirement Income Security Act (ERISA) may apply. Be sure to consult your tax advisor or attorney regarding your own situation. • Products are issued by Allianz Life Insurance Company of North America, 5701 Golden Hills Drive, Minneapolis, MN 55416-1297. 800.950.1962 www.allianzlife.com • Product and feature availability may vary by state.