Allianz Life Insurance Company of North America BUSINESS
Allianz Life Insurance Company of North America BUSINESS CONTINUATION STRATEGIES using life insurance An introduction to small-business owners Buy-Sell Agreements For financial professional use only – not for public distribution. PPT-262 1/2014
Agenda 1. Why business continuation planning? 2. Buy-sell agreements 3. Cross-purchase agreements 4. 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. 2
1 Why business continuation planning? 3
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? 1”Small 4 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 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.
Potential pitfalls survivors may face after the death of a business owner Conflict between surviving owners & family Concerns of employees & creditors Lack of market Valuation difficulties Lack of income for family Surviving owners may be forced to buy via installment sale unless funded with insurance 5
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. 6 Some common uses of life insurance in business succession planning Key person life insurance Buy sell agreements Executive bonus plans Nonqualified deferred compensation
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 Source: 1“Small World: Trends in the U. S. Small Business Market, LIMRA, 2013. 7 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 employees 1
HOW FIUL WORKS MAXIMUM PREMIUM ble a ail v a Pays POLICY PREMIUMS UE L A OW y R n V l to G paid A H S tia m is A n e C pot miu re the re p s Ha s mo a Cash value may be accessed via POLICY LOANS AND WITHDRAWALS 1 Minimum premium POLICYHOLDER POLICY FEES & CHARGES Fees & charges used to fund DEATH BENEFIT TO BENEFICIARIES AND OTHER VARIOUS EXPENSES 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. 8 For financial professional use only – not for use with the public.
2 Buy-sell agreements 9
Buy-sell agreements funded with life insurance A BUY-SELL Agreement is the legal contract obligating the sale and purchase of the business. 10 Legal contract to sell the business upon a specific event Indicates to whom the business will be sold The percentage of ownership to be sold The sale price Provides details on the sale
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 11 BUY-SELL AGREEMENTS CAN PLAY A VITAL PART in a business continuation strategy.
3 Cross-purchase agreement 12
Cross-purchase buy-sell agreements The agreement is between THE BUSINESS OWNERS. Hypothetical example: 1 ABC 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 1 Hypothetical 13 example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.
Cross-purchase agreement hypothetical example If CARLA dies: Carla’s ESTATE 14 Andy’s $50, 000 insurance proceeds Bobbie’s $50, 000 insurance proceeds § 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. Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.
Cross-purchase agreements Some ADVANTAGES: Some ADDITIONAL CONSIDERATIONS: § 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 § Can become more complex when there are more than two owners § N(N-1) policies are required 15 - 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
Cross-purchase agreements Potential tax consequences of a cross-purchase agreement To BUSINESS: To BUSINESS OWNERS: § No income tax ramifications § Agreement is among the owners § Life insurance purchased personally § Insurance premiums are not income -tax-deductible § Death benefit is generally incometax-free § Transfer for value problems could tax the death benefit § Deceased business owner has purchase value generally included in their taxable estate 16
4 Entity purchase agreements 17
Entity purchase agreement hypothetical example The agreement is between the BUSINESS AND THE OWNER(S). Hypothetical example: 1 ABC 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 1 Hypothetical 18 example is for illustrative purposes only. These characters are fictional and not actual Allianz clients.
Entity purchase agreement hypothetical example If CARLA dies: kdk $ ea 100, th 00 be 0 ne Se fit l l of s h sh er ar po es rti on kk kk kk Andy Bobbie Carla’s ESTATE § 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. Hypothetical example is for illustrative purposes only. These characters are fictional and not actual Allianz clients. 19
Entity purchase agreements Some ADVANTAGES: § § Simple to understand 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. 20
Potential tax consequences To the business: To the business owners: § Business cannot deduct the premium § No taxable impact to them – business from income taxes owns the policies § EOLI rules apply to obtain a § Deceased shareholder includes the tax-free death benefit¹ purchase price of the business in their taxable estate § C corporations: Corporate AMT may apply to subject cash value growth § Surviving owners are not involved in and/or death benefit to income taxation 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. 21
The next step Work with your team of professionals to see if fixed index universal life insurance can help with your businessplanning strategies.
Disclosures Allianz 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. 23
OUR MISSION: Allianz Life Insurance Company of North America is the trusted authority in insured retirement solutions for consumers working with a financial professional. 24
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