Business Planning Strategies

Business PlanningStrategies

Cincinnati, Ohio

Agenda

Typical Ownership Concerns

Business Planning Strategies

.

How do I secure a comfortable

retirement for myself using

business dollars?

Ownership Concern

Ownership Concern

How do I attract and retain good employees?

Retirement PlansQualified Plans

Profit Sharing Plans401(k)Simplified Employee Pension (SEP)Defined Benefit Plans

Nonqualified PlansExecutive BonusNonqualified Deferred Compensation

Qualified Plans

AdvantagesDeduction for

BusinessTax Deferral

for Participants

DisadvantagesNon-discrimination

RulesContribution LimitsAdministration Costs

TAX BREAKS

Nonqualified Retirement Plans

Executive Bonus

Deferred Compensation

Executive Bonus

Executive Bonus

Employer Employee

Premium PaidSalary Bonus

Deductible Taxable

Owns Life InsurancePays Premium

Executive Bonus

Taxable compensation to employeeTax deductible to employer

Must be reasonable compensation

Written agreementDeath benefit tax free to

employee’s beneficiaries

Ways to Handcuff An Employee With

Executive Bonus

Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar

Ways to Handcuff An Employee With

Executive Bonus

Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar

Ways to Handcuff An Employee With

Executive Bonus

Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar

Nonqualified Deferred

Compensation Plans

Nonqualified Deferred Compensation

Written agreement requiredUnsecured promiseSubstantial risk of forfeiture

No current taxable income for employee - taxable when paid

No current tax deduction for employer - deductible when paid

Nonqualified Deferred Compensation PlansThree Types of Plans

1 Salary Reduction

2 Salary Continuation

3 Death Benefit Only

Nonqualified Deferred Compensation

Employer Employee

During Employment

Written Agreement

•Unsecured Promise To Pay Retirement Income•Substantial Risk of Forfeiture

Funding Nonqualified Deferred Compensation

Must Be Unsecured - Funding Can Not Be Linked To Agreement

Funding OptionsSinking FundLife Insurance

Employer Employee

Salary Paid

Deductible Taxable

Nonqualified Deferred CompensationDuring Covered Retirement Period

Business Owner Concerns

How do I guarantee my family will receive the full value of my business if something happens to me?

How do I assure my business will continue after I retire?

Every Business Owner Will Someday….

DieBecome

DisabledRetire

Only Three Options Exist

Retain the business in familySellLiquidate

Average loss with liquidation = 60% of fair market value

Competing Interests of Heirs and Surviving Owners

Heirs WantTop Sales Price Prompt SettlementValue Set for IRSNo Worries As To

Business

Surviving Owners Want:Minimum Sales PricePrompt TransferFull ControlContinuing Line of CreditRetention of Customers and

Employees

Advantages of Having A Succession Plan

Guarantees a buyer.Can establish value for estate taxation.Sets terms of sale. Provides for orderly transition to new

owners.Easily funded with life insurance.

Special Concerns of a Family Business

Equalization Of Estate

ControlTimingFamily Harmony

Basic Buy-Sell Agreements

Cross PurchaseEntity Purchase

Cross Purchase

Entity

A B C

Owners each enter intoan agreement with each of the other owners topurchase his/her shareat the designated time.

Cross Purchase

Entity

AB

C

Key Advantage - Increase in basis for survivors

Current fair market value $3,000,000Each owner had original basis of $100,000

Assume A dies

B buys 1/2 of A’s interestincreases his basis by $500,000

C buys 1/2 of A’s interestincreases his basis by $500,000

Cross Purchase

Entity

A B C

Key Disadvantage - Multiple policies

A buys policies on B and CB buys policies on A and CC buys policies on A and B

Total = 6 policies

Entity Purchase

Entity

A B C

Entity enters into anagreement with each ofthe owners to purchasehis/her share at the designated time.

Entity Purchase

Entity

A B C

Key Advantage - Fewer policies

Entity buys one policy on each owner.

Entity Purchase

EntityA

B C

Key Disadvantage - No increase in basis for survivors.

Assume A dies

B and C now each own 1/2 of thetotal business interest ($1,500,000). They each still have only their original basis of $100,000.

Current fair market value = $3,000,000Entity purchases A’s interest for $1,000,000

A, B, and C each had original basis of $100,000.

Setting the Value Of The Business

IRC Sec. 2973 rules for business valuation - family businessBona fide business arrangementNot simply a device to transfer

business to family for less than full and adequate consideration

An arm’s length transaction

Setting the ValueParties not related

Formula,Fixed Price, orIndependent Appraisal

Parties relatedReasonable FormulaIndependent Appraisal After Death

Funding the AgreementPersonal fundsSinking fund Borrowed fundsInstallment paymentsLife insurance

Advantages of Life Insurance

Financing guaranteed Proceeds free from income taxCash values can be used for a

buyout due to retirement or disability

Most economical methodCredit position is strengthened

Combined Solutions

Cross PurchaseExecutive Bonus

Entity PurchaseNon-Qualified Deferred

Compensation

Thank You