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Business Planning Strategies
Business PlanningStrategies
Cincinnati, Ohio
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Agenda
Typical Ownership Concerns
Business Planning Strategies
.
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How do I secure a comfortable
retirement for myself using
business dollars?
Ownership Concern
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Ownership Concern
How do I attract and retain good employees?
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Retirement PlansQualified Plans
Profit Sharing Plans401(k)Simplified Employee Pension (SEP)Defined Benefit Plans
Nonqualified PlansExecutive BonusNonqualified Deferred Compensation
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Qualified Plans
AdvantagesDeduction for
BusinessTax Deferral
for Participants
DisadvantagesNon-discrimination
RulesContribution LimitsAdministration Costs
TAX BREAKS
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Nonqualified Retirement Plans
Executive Bonus
Deferred Compensation
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Executive Bonus
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Executive Bonus
Employer Employee
Premium PaidSalary Bonus
Deductible Taxable
Owns Life InsurancePays Premium
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Executive Bonus
Taxable compensation to employeeTax deductible to employer
Must be reasonable compensation
Written agreementDeath benefit tax free to
employee’s beneficiaries
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Ways to Handcuff An Employee With
Executive Bonus
Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar
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Ways to Handcuff An Employee With
Executive Bonus
Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar
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Ways to Handcuff An Employee With
Executive Bonus
Restrictive EndorsementSeparate Contract For RepaymentSplit Dollar
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Nonqualified Deferred
Compensation Plans
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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
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Nonqualified Deferred Compensation PlansThree Types of Plans
1 Salary Reduction
2 Salary Continuation
3 Death Benefit Only
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Nonqualified Deferred Compensation
Employer Employee
During Employment
Written Agreement
•Unsecured Promise To Pay Retirement Income•Substantial Risk of Forfeiture
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Funding Nonqualified Deferred Compensation
Must Be Unsecured - Funding Can Not Be Linked To Agreement
Funding OptionsSinking FundLife Insurance
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Employer Employee
Salary Paid
Deductible Taxable
Nonqualified Deferred CompensationDuring Covered Retirement Period
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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?
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Every Business Owner Will Someday….
DieBecome
DisabledRetire
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Only Three Options Exist
Retain the business in familySellLiquidate
Average loss with liquidation = 60% of fair market value
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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
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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.
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Special Concerns of a Family Business
Equalization Of Estate
ControlTimingFamily Harmony
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Basic Buy-Sell Agreements
Cross PurchaseEntity Purchase
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Cross Purchase
Entity
A B C
Owners each enter intoan agreement with each of the other owners topurchase his/her shareat the designated time.
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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
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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
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Entity Purchase
Entity
A B C
Entity enters into anagreement with each ofthe owners to purchasehis/her share at the designated time.
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Entity Purchase
Entity
A B C
Key Advantage - Fewer policies
Entity buys one policy on each owner.
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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.
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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
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Setting the ValueParties not related
Formula,Fixed Price, orIndependent Appraisal
Parties relatedReasonable FormulaIndependent Appraisal After Death
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Funding the AgreementPersonal fundsSinking fund Borrowed fundsInstallment paymentsLife insurance
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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
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Combined Solutions
Cross PurchaseExecutive Bonus
Entity PurchaseNon-Qualified Deferred
Compensation
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Thank You