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

1. Business Succession Planning With Key Person Coverage And Buy-Sell Agreements OLA 1069E 0709

2. 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.

3. 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?

4. 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

5. 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

6. Business Succession Planning Tools Key Person Coverage Buy-SellArrangements BusinessValuation

7. Key Person Coverage • How long would it take to replace your key person(s)? • 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.

8. 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.

9. 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

10. 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

11. 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

12. Funding A Buy-Sell Agreement There are three primary ways to fund a buy-sell agreement: 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.

13. 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

14. Key Provisions Of ABuy-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

15. 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)

16. Cross Purchase

17. 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

18. Stock Redemption

19. 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

20. Wait-And-See

21. 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

22. 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

23. 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

24. 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.

25. Business Succession Planning With Key Person Coverage And Buy-Sell Agreements OLA 1069E 0709