An introduction to small-business owners

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BUSINESS CONTINUATION STRATEGIES using life
insurance

• An introduction to small-business owners
• Buy-Sell Agreements

• PPT-262 1/2014

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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.

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1

• Why business continuation planning?

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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

1Small 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.
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Potential pitfalls survivors may face after the
death of a business owner
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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
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The death benefit is the main reason for
purchasing life insurance

• 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

• 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 1Small World Trends in the U.S. Small
Business Market, LIMRA, 2013.
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HOW FIUL WORKS
MAXIMUM PREMIUM
Cash value may be accessed via POLICY LOANS AND
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.
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2

• Buy-sell agreements

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Buy-sell agreements funded with life insurance

• A BUY-SELL Agreement
• is the legal contract obligating the sale and
  purchase of the business.

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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.
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3

• Cross-purchase agreement

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Cross-purchase buy-sell agreements

• The agreement is between the business owners.
• Hypothetical example1 ABC Corp.
• Three equal owners (Andy, Bobbie, and Carla)
• If one owner dies, the two surviving owners will
  purchase the deceaseds 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.
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Cross-purchase agreement hypothetical example

• If CARLA dies
• Andy and Bobbie use the death benefit from their
  life insurance policies on Carlas life to buy
  out her interest in the corporation.
• Andy and Bobbie now each own 50 of ABC Corp.

Carlas ESTATE
Hypothetical example is for illustrative purposes
only. These characters are fictional and not
actual Allianz clients.
Andys 50,000 insurance proceeds
Bobbies 50,000 insurance proceeds
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Cross-purchase agreements
Cross-purchase agreements

• 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

• 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

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Potential tax consequences of a cross-purchase
agreement
Cross-purchase agreements

• 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

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4

• Entity purchase agreements

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Entity purchase agreement hypothetical example

• The agreement is between the business and the
  owner(s).
• Hypothetical example1 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 deceaseds
  business from his/her estate

1Hypothetical example is for illustrative
purposes only. These characters are fictional and
not actual Allianz clients.
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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
  Carlas estate to buy her business interest
• ABC would receive Carlas 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
Carlas ESTATE
Bobbie
Hypothetical example is for illustrative purposes
only. These characters are fictional and not
actual Allianz clients.
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Entity purchase agreements

• 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

• 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

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.
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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.
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The next step

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

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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.

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