Business Succession Planning With Key Person Coverage And Buy-Sell

							        ®




                 Business
                 Succession
                 Planning With Key
                 Person Coverage
                 And Buy-Sell
                 Agreements

OLA 1069E 0709
    ®



        This material was not intended or written to be used, and
        cannot be used, to avoid penalties imposed under the Internal
        Revenue Code. This material was written to support the
        promotion or marketing of the products, services, and/or
        concepts addressed in this material. Clients and other
        interested parties to whom this material is promoted,
        marketed, or recommended should consult with and rely
        solely on their own independent advisors regarding their
        particular situation and the concepts presented here.




2
        Planning Your Company’s Future
    ®




        What would happen to your business if something should
        suddenly happen to an owner or a key employee right now?

         Who would run the business?

         Would revenues decrease?

         Would clients take their business elsewhere?

         Do you think your business could survive?




3
        Planning Your Company’s Future
        (Cont.)
    ®




         Without adequate planning, your business may be negatively
          impacted or forced to close in a relatively short period of time

         Why? Not because you did something wrong, but because you
          did nothing



                  “Most people don’t plan to fail; they fail to plan.”

                                   ~ John L. Beckley




4
        The Need For A Business Succession
    ®
        Plan
         Crucial step to help ensure successful transfer of your company
          or business interests

         Assures funds will be available to provide maximum financial
          flexibility in event of retirement, death, disability, or other
          separation from business

         Reduces chances of conflict among remaining principals,
          employees, and heirs, lessening chance of costly and time-
          consuming litigation




5
        Business Succession Planning Tools
    ®




          Key Person      Buy-Sell    Business
           Coverage    Arrangements   Valuation




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        Key Person Coverage
    ®




        1. How long would it take to replace your key person(s)?

        2. How much business does your company stand to lose
           during transition?



          - Insurance policy on key person’s life, where
          business is owner and beneficiary, may help cover
          cost of transition.




7
        Benefits Of Key Person Coverage
    ®




        Key Person Coverage provides protection from economic
        loss caused by a key employee's death:

         Funds are now available to recruit, hire and train the
          new replacement.

         Access to the life insurance cash value for a variety of
          business needs, such as collateral for a loan or funding of
          salary continuation plans.

         The life insurance death benefits are generally federal
          income tax–free.




8
        What Is A Buy-Sell Agreement?
    ®




         Legally binding contract that can be used with all types of
          businesses

         Agreement must be drafted by attorney

         Stipulates that, at death, retirement, disability, or other
          withdrawal of principal, his/her share of business must be sold
          to remaining principals, key employees, and/or business itself




9
         What Is A Buy-Sell Agreement? (Cont.)
     ®




          Remaining principals, key employees, and/or business itself
           must purchase portion of business owned by deceased, retired,
           disabled, or withdrawing principal

          Life insurance may be purchased to help fund agreement at
           death or retirement




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         Benefits Of Buy-Sell Planning
     ®   Agreements
          Can help mitigate conflict and speed up transition
          Helps to make certain business continues, without loss/reduction
           of revenue, assets or client base
          Pre-approves who will run the business
          Prevents inadvertent termination of business status
          Helps to secure value of business interest or stream of income
           to the surviving principals and heirs.
          Pre-funds sale of decedent's business interest from estate,
           often with life insurance
          Provides liquidity for taxes to the estate


11
         Funding A Buy-Sell Agreement
     ®




             There are three primary ways to fund a buy-sell agreement:
                                                                            Requires large sums of liquid assets that may not be
                                                                            readily available, particularly at the time of an unforeseen
                              Pay Cash                                      event. May have to liquidate valuable personal or business
                                                                            assets below market value in order to raise cash quickly.


                                                                            The loss of an owner or key person may impair the credit
                               Borrow                                       rating of the business and its ability to borrow. Principal
                             the Money                                      plus interest must be paid. This could be a tremendous
                                                                            strain on the business budget.

                                                                            Money is available from the policy cash values or death
                      Purchase a                                            benefit for the purchase of the business interest.1
                Life Insurance Policy                                       Policy cash values grow tax deferred and death proceeds
                                                                            are federal income tax-free.2

         1 Loans  and withdrawals will affect the cash value of the policy and could affect the death benefit. Amounts received on withdrawals and
           surrenders may be subject to federal income taxes and/or company-imposed surrender penalties.
         2 For a C corporation, the annual increase in cash value and the life insurance death benefits may be subject to the corporate

           alternative minimum tax.



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         Key Provisions Of A Buy-Sell Agreement
     ®




         Buy-Sell Agreement specifies:

          Owner will not dispose of his/her ownership interest during
           owner’s lifetime without first offering it for sale to other owners

          Who will be selling and who will be buying

          It is mandatory for seller to sell and for buyer to buy




13
         Key Provisions Of A
     ®
         Buy-Sell Agreement (Cont.)
         Buy-Sell Agreement specifies:

          Purchase price based upon pre-established formula or valuation
           to be used at time of death in order to determine definitive price
           for ownership interests

          Which state laws apply

          Changes/termination of agreement

          Process to update coverage should be established and valid
           reasons to terminate agreement should be stated




14
         Types Of Buy-Sell Agreements:
     ®   Cross Purchase
          The remaining principals will purchase the business interest of
           the deceased or departed owner

          Each principal purchases life insurance policy on each of the
           other business principals

          For two owners: A purchases a policy insuring B's life, and B
           purchases a policy insuring A's life.

          Determination of number of policies:

                               n = number of owners

                              Policies needed = n(n-1)


15
         Cross Purchase
     ®




16
         Types Of Buy-Sell Agreements:
     ®   Stock Redemption
          Business (instead of individual) agrees to purchase stock from
           deceased or departing principal(s)

          Business owns and is the beneficiary of life insurance policies
           on principals

          One policy purchased for each principal




17
         Stock Redemption
     ®




18
         Types Of Buy-Sell Agreements:
     ®   Wait-And-See
          Possible solution to changing tax laws, business needs, as
           well as personal issues

          Actual purchaser of deceased principal’s ownership interest
           and respective amounts not determined until death of
           business principal

          Initially set up as a cross purchase with principals purchasing
           policies on each of the other co-owners




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         Wait-And-See
     ®




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         Wait-And-See:
     ®   Protecting The Business
          At death, policy benefits are paid to remaining principals.
           They either loan money to business or use to make the
           purchase themselves.

          Business has first option to purchase interest

          If business does not exercise option, owners have option
           to purchase interest

          If owners do not exercise option to purchase interest, business
           must purchase interest




21
         The Need For A Business Valuation
     ®




          Often, owner has no idea what business is actually worth

          Most business owners over or undervalue their businesses by
           at least 50%

          Without proper valuation, owner’s financial plan may not meet
           owner’s needs at time of major event, such as sale of business,
           divorce, or death of owner

          Regular appraisals can determine current market value
           of business

          Valuation is crucial factor in determining individual’s net worth
           and life insurance needs

          Reduces chance that IRS will challenge the stated value of
           the business

22
         Business Succession Planning
     ®   Minimizes Risk
          Help protect yourself and your business from economic loss
           and increase likelihood of success

          Reduce risk of loss at death of key person or at time of
           business transfer

          Plan to retain control of business and assure funds will be
           available to provide financial flexibility




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     ®




         Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company
         (collectively “Transamerica”), and their representatives do not give tax or legal advice.
         This material is provided for informational purposes only and should not be construed
         as tax or legal advice. You should rely solely upon your own independent advisors
         regarding your particular situation and the concepts presented here.

         Discussions of the various planning strategies and issues are based on our
         understanding of the applicable federal tax laws in effect at the time of presentation.
         However, tax laws are subject to interpretation and change, and there is no guarantee
         that the relevant tax authorities will accept Transamerica’s interpretations. Additionally,
         this material does not consider the impact of applicable state laws upon clients and
         prospects.

         Although care is taken in preparing this material and presenting it accurately,
         Transamerica disclaims any express or implied warranty as to the accuracy of any
         material contained herein and any liability with respect to it. This information is current
         as of July 2009.

         Transamerica Financial Life Insurance Company is authorized to conduct business in
         the state of New York. Transamerica Life Insurance Company is authorized to conduct
         business in all other states.


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         ®




                 Business
                 Succession
                 Planning With Key
                 Person Coverage
                 And Buy-Sell
                 Agreements

OLA 1069E 0709