Business estate planning:
How to preserve your life's work
You've spent a lifetime building your business.
Take a moment to make sure that your hard
work will survive the death of you or one
of your partners.
As the owner of a closely-held business,
much of your wealth is probably tied up
in the business. While returning earned
income back into the business helps finance
growth, it can cause severe liquidity problems
for your estate when you die. After paying
probate and estate taxes, your estate and
surviving family members also may encounter
liabilities that become payable upon your
death. They may also face the potential
of decreased business earnings, due to your
absence.
There are ways to overcome these liquidity
problems. Business-oriented planning tools
can help reduce estate taxes and make the
best use of the cash available. The most
common business estate-planning tools are
buy-sell agreements, Section 303 stock redemptions,
Section 6166 estate tax deferrals and the
qualified family-owned business exclusion.
Business-owned life insurance can be used
to fund each of these planning methods.
Buy-Sell Agreements
Buy-sell agreements can establish the value
of your business for estate-tax purposes
and improve your estate's liquidity by assuring
a ready market for your business upon your
death. These agreements also protect business
partners from sharing ownership with a deceased
stockholder's family.
There are two main forms of buy-sell agreements:
cross-purchase and stock redemption. In
an insurance-funded cross-purchase arrangement,
each business owner buys an insurance policy
on the other, naming themselves as beneficiary.
At the death of one of the owners, the surviving
owner receives tax-free insurance proceeds
to use in purchasing the deceased owner's
stock from his or her estate.
In an insurance-funded stock-redemption
arrangement, the corporation purchases the
stock of a deceased shareholder. Here the
business is the owner and beneficiary of
life insurance policies on each shareholder.
A partnership looking for a business continuation
plan may use a similar arrangement called
an entity purchase.
A buy-sell agreement that is funded with
life insurance will benefit:
Your Family:
- Prevents conflict with surviving owners
- Ensures that your family receives
a fair price for your business
- May set the value of your business
for estate-tax purposes
- Provides needed cash
Your Business:
- Keeps new and/or unwanted owners
out of the business
- Prevents disputes
- Ensures continuity and orderly transfer
of ownership
- May provide tax-free cash to purchase
stock
Section 303 Redemptions
Section 303 of the Internal Revenue
Code gives your estate a one-time opportunity
to remove cash or other property from
your business, at little or no tax cost,
through a partial redemption of your
stock. This can provide the liquidity
your survivors need to pay funeral costs,
estate and administrative expenses,
and state and federal death taxes.
To be eligible for a Section 303 redemption,
the stock value must exceed 35 percent
of your estate. The maximum amount that
can be paid under such a plan equals
the total amount of the federal estate
tax, state death taxes, funeral and
administrative expenses. Corporate-owned
life insurance can be used to fund the
redemption. Under this arrangement,
your business purchases an insurance
policy on your life and at your death
uses the tax-free proceeds to buy enough
stock from your estate to cover death
expenses and taxes.
Section 6166
An estate tax burden can force the
liquidation of a closely-held business.
Internal Revenue Code Section 6166 was
designed to prevent this liquidation.
If the business interest constitutes
more than 35 percent of your adjusted
gross estate, under Section 6166 the
executor may elect to pay the estate
tax attributable to the value of the
business in 10 annual installments,
beginning no later than five years after
the date of your death.
There are a number of requirements
you'd have to meet to be eligible for
the Section 6166 extension. If your
estate qualifies, life insurance offers
an economical way to pay these installments.
Qualified Family-Owned Business
Exclusion
If your business qualifies as "family
owned," you may be able to exclude part
of it from estate taxation. The amount
you can exclude is $675,000 if the death
of the estate owner occurs in 1998.
That qualifying amount gradually decreases
over time to $300,000 if the death occurs
in the year 2006 or later. Your business
qualifies as family owned if the business
comprises more than 50% of your total
estate and you pass the estate on to
a "qualified heir." A qualified heir
is generally defined as a spouse, child,
grandchild or other descendent. Your
heirs, however, should realize that
they have to hang onto the business
for at least 10 years following such
an estate transfer. If they don't, they
may have to pay the full estate taxes
that were avoided. Life insurance can
provide your heirs with the cash necessary
to pay estate taxes whether or not you
qualify for this exclusion.
Business Valuation for Estate Planning
No matter what technique you select
for your company, determining the value
of the business is a key step in the
estate planning process. Why? First,
in the case of a buy-sell agreement,
you need to know the value of the business
to determine the price and fund the
agreement. Second, because the business
is part of your estate, the valuation
is needed to estimate the estate taxes;
this helps you calculate the cash or
liquidity needed to administer the estate.
Finally, the value of the business must
be reported on the estate tax return
when the owner dies.
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to Business Solutions
Business continuation
planning:
Prepare for the continued success of
your business after you're gone.
Business continuation planning tools
can help you avoid the problems that
can occur when a business owner dies.
A life insurance funded business continuation
plan provides a wide variety of benefits
for your family and the business.
For your family:
- Prevents conflict with surviving
owners
- Assures a fair price for the business
- May set the value of your business
for federal estate tax purposes
- Can provide cash for your estate
For the business:
- Allows you to maintain control
of the business
- Prevents disputes
- Assures orderly transfer of
the business upon death
- Provides an income tax-free
death benefit to purchase shares
of the business
Several business continuation
plans are available:
Cross Purchase Plan
An agreement between co-owners
of a business. Surviving owners
purchase pro rata shares of the
deceased owner's stock from the
estate. To fund the purchase, each
stockholder owns, pays premium on
and is the beneficiary of an appropriate
amount of life insurance on the
other owners.
Stock Redemption/Entity Purchase
Plan
The business becomes obligated
to purchase the stock or partnership
share of a deceased shareholder
or partner. The business owns, pays
premium on and is the beneficiary
of life insurance on each shareholder
or partner.
LifeCycle Buy-Sell
Combines the benefits of the traditional
stock redemption and cross purchase
methods. Provides several benefits,
including the ability to supplement
retirement income and allocate the
premiums as desired.
Section 303 Stock Redemption
Plan
A special type of stock redemption
plan that can provide cash to the
estate of a deceased shareholder
in a tax-favored manner. Allows
a corporation to redeem a deceased
shareholder's stock without incurring
income taxable dividends. The potential
for dividend taxation upon a
Solutions for you and your family
When it comes to financial matters, it's easy to see where you want to go. It's harder to figure out how to get there. Whether you're saving for retirement, investing for the future, funding a college education or reaching for any of a hundred other financial goals, we can help.
Solutions for your business
For your business to reach its full potential, you need to understand the financial tools at your disposal. We can apply our expertise to help your business succeed.
Financial Planning
A dynamic approach to helping you and your family reach your financial goals
We use financial planning tools and resources to help you and your family reach your financial goals.
We provide expertise in the six areas with the biggest impact on your personal financial situation, and develop plans
and strategies to help you succeed.
We help you identify where you want to go, and show you how to get there, turning financial planning into a powerful force for you.
- Current Financial
Position: The first step involves getting a snapshot of where things are today, including assets, liabilities, net worth and cash flow.
- Protection Planning:
Financially protecting yourself and your family from death, disability, accident and illness
- Investment Planning:
Strategies to help you retain assets and minimize payment of unnecessary taxes.
- Tax Planning:
Strategies to help you retain assets and minimize payment
of unnecessary taxes.
- Retirement Planning:
Creating accumulation and income strategies that help you achieve a financially secure retirement.
- Estate Planning:
Strategies for preserving and distributing assets to heirs in a way that fits your goals and desires, while minimizing estate taxes, probate expenses and estate administrative costs.
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Current Financial Position
Understanding your current financial situation is one of
the most important aspects of doing financial planning. Your
current assets, liabilities, liquidity and cash flow will
affect almost every other short or long-term goal that you
have.
Many people don’t realize the long-term impact of the financial
decisions they make on a day-to-day basis. Your financial
needs in the event of a death or disability will be closely
related to your current situation, and areas such as income
tax liability, asset allocation, estate tax liability, ownership
status of assets, and control of assets are all inter-related.
If you already have a good understanding of your current
financial situation, congratulations! If you could benefit
from a greater understanding of where you stand today, there
are numerous ways that you can begin.
Use worksheets to calculate your net worth and track your
cash flow. Personal finance programs such as Quicken™ or MS
Money™ are also helpful in gaining a better understanding
of where you stand today.
For help in identifying strengths and weaknesses in your
current financial picture, or for help in developing a comprehensive
financial plan, select the "Contact Us" option located in
the main site menu at the top of the page. Our Financial Advisors
are just a click away!
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Protection Planning
Protecting your family from major financial risks is one
of the cornerstones of any sound financial program. Life insurance,
disability insurance, health coverage and long-term care insurance
should all be evaluated to help minimize your exposure to
financial risk.
By working with a knowledgeable Financial Advisor, you can
develop a comprehensive approach to assessing your need for
additional coverage. To help you get started, click on the
Financial Calculators link located in the main site menu at
the top of the page.
While there are more complicated systems for calculating
your insurance needs, this provides you with an indicator
of whether you should consider increasing your life insurance
coverage.
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Investment Planning
Managing risk in your investments
Successful investing is based on managing risk — understanding
what risk means and using it to your advantage.
Risk refers to the chance that an investment's value or return
will be lower than expected. Investments with potential for
greater loss are viewed as riskier than those with a lesser
chance of loss.
However, the risks associated with investments differ in
the long-term compared to the short-term. In the long-term,
so-called "risky" investments may offer a greater chance of
reaching a financial objective.
Risk Levels
For example, a government bond that guarantees a return of
principal and $100 interest after 30 days is risk-free in
the short term, since the return will always be $100 regardless
of events in the financial markets, if held to maturity. In
contrast, common stock may have the potential of earning as
much as $200 and as little as $0 and offer no protection of
principal.
In the long-term, the picture changes. Based on historical
stock performance, risk faced by stocks declines over the
long-term. The risk faced by government bonds increases, however,
since their long-term returns they offer are frequently outperformed
by other types of investments and may not always keep up with
inflation and taxes.
The risk and return of any one investment should be viewed
in relation to your total investment portfolio — the combination
of investments you’re making. If you hold just one or two
accounts, you are more exposed to risk than if your money
is more widely diversified. Diversification means investing
in instruments which behave differently during a given economic
situation or time period.
A Financial Advisor can help you determine an appropriate
level of risk and diversification for your financial goals,
profile and time horizon. Talk to an advisor or representative
today about developing a customized investment strategy.
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Tax planning
As Ben Franklin aptly pointed out over two centuries ago,
taxes are one of the certainties of life. Our challenge is
to use the provisions of the tax code to our advantage wherever
possible.
For example, income can be from earned (employment) or unearned
(investment) sources, and can be taxed today, taxed later
(deferred) or not taxed at all (exempt). How we decide to
hold our assets and receive our income will have the greatest
impact on our income taxes.
Everyone knows that the U. S. tax code is extremely complex.
Many types of assets (tax-exempt bonds, IRAs, annuities, and
cash-value life insurance to name several) offer significant
tax advantages. Working with a financial advisor who understands
the tax implications of your financial decisions will help
assure that you are making those decisions with all the pertinent
information, often resulting in significant tax savings. For
help in identifying strategies to reduce your taxes, or for
help in developing a comprehensive financial plan, contact
one of our knowledgeable Financial Advisors today.
This information is a general discussion of the relevant federal tax laws. It is not
intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties.
This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer.
Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues
applicable to their specific circumstances.
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Retirement planning
Plans help address the changing concept of retirement
The concept of retirement is changing. And so are the ways
that people prepare for it. For some, retirement means lots
of leisure time to pursue hobbies and interests. For others
it means a change to part time work, and still others will
spend their new found free time with family members or as
a volunteer in the community.
Whatever your plans for retirement may be, you have a valuable
tool at your fingertips to help you prepare financially for
what could be the most rewarding part of your life. This tool
is your retirement plan. Many retirement programs offer investment
options to choose from, and contributions can come from your
employer, you or both to provide the accumulation you need
to save for the future.
Three retirement savers
Sid Saver, 25, has a long way to go before his golden years.
With an income of $25,000 in the early stages of his career,
Sid's working with an eye to the future. If Sid defers just
4.7 percent of his annual income to his 401(k), he could retire
with 80 percent of his annual salary*, adjusted for inflation.
And, Sid's tolerance for risk is high, given his long time
horizon. He'll allocate his money into an aggressive portfolio
made up of equity investments.
Debra Due Diligence, 35, hasn't started contributing to her
pension plan, opting instead to save $25,000 in an IRA plan,
and that may help offset possible foregone earnings. She'll
have to put more than 12.1 percent away in order to enjoy
80 percent* of her $35,000 income at retirement. Deb will
put her money into a moderately aggressive portfolio with
20 percent in fixed income and 80 percent in equity.
Pete Procrastinator has waited even longer. At age 48, he's
earning $50,000 per year as an editor for a small publishing
company. But he has only saved $5,000 in an IRA. Pete would
have to save more than 30 percent of his before-tax income
in order to retire with just 80 percent* of his current income.
That's more than the law allows, so Pete would have to use
another savings vehicle, as well. Pete's not too worried,
though. He plans to continue working part time after age 65,
and will invest 12 percent into a moderate portfolio, with
40 percent of funds going to a fixed income group and 60 percent
going to an equity group.
No matter where you are in your career, a retirement program
offers a wide range of investment options.
The most important thing you need to do is use it. Here's
a review of the three hypothetical retirement examples:
*Assumes a 3.5 percent inflation rate, investment
growth of eight percent before and six percent after retirement,
no employer-contribution pension plan and standard calculated
Social Security income. These are hypothetical examples for
illustrative purposes only and are not indicative of any particular
investment.
Developing a strategy for a financially secure retirement
is no simple task. That's why an experienced professional's
knowledge and objectivity can make this important challenge
more manageable.
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Estate planning
Helping you protect your legacy
No matter how large your estate is, a sound estate plan remains
the best assurance that your assets will be distributed to
the heirs you select in the way you choose. It can also help
protect your financial security if you become incapacitated.
While reducing taxes can be an important goal, it’s not the
only reason to develop an estate plan. Regardless of what
happens with tax legislation, an estate plan can be an essential
financial planning tool.
As you put together your own estate plan, consider these
elements:
- A will can specify who gets what and name guardians
for minor children.
- Durable powers of attorney allow whomever you choose
to make financial and medical decisions if you become unable
to do so yourself.
- Beneficiary designations on retirement accounts, life
insurance policies and the like must be coordinated with
the rest of your estate plan. Those assets will go to the
listed beneficiaries, regardless of your will.
- Titling of assets also should be coordinated with your
total estate plan. Property owned jointly with right of
survivorship, for instance, typically goes to the survivor,
superseding any instructions in a will.
- Trusts are flexible tools that can be used to manage
investments during your lifetime and beyond, distribute
assets to heirs under circumstances that you spell out,
minimize estate taxes, maintain the privacy of your financial
affairs and protect assets from lawsuits and seizures.
Estate planning can protect your family's interests and
ensure that your wishes are carried out.
What if I don't have a will?
If you die without a will or other testamentary document,
the probate court distributes your estate according to state
laws. About a third of the states have adopted all or part
of the Uniform Probate Code, which provides for the following
structure for distributing property if you die without developing
an estate plan (intestate):
- If there is a surviving spouse and no surviving children
or surviving parent of decedent, all property passes to
the spouse.
- If there is no surviving children but decedent is
survived by a parent or parents, the first $50,000, plus
one-half the balance of the estate passes to the surviving
spouse. The remainder passes to the decedent's parents.
- If there is a surviving spouse and surviving children
of both, the first $50,000 plus one-half the balance of
the estate passes to the surviving spouse. The remainder
passes to the surviving children equally.
- If there is no spouse and no children, the property
is divided evenly between your parents. If no parents
are living, it is evenly divided among the descendants
of your parents, namely your siblings.
- If there is no living relative, the property reverts
to the state.
In addition, the probate process is time consuming and
expensive. Consult one of our financial professionals
to learn how to protect your estate.
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