Grand Slam

BUSINESS SUCCESSION PLANNING

The Grand Slam Profile: Business owners have many uses for business-owned life insurance.1 Some of the goals that can be very successfully funded with life insurance include:  Solving succession planning needs with a Buy-Sell agreement;  Key Person coverage to indemnify the company against the loss of a key employee; and  Executive benefits payable to certain key employees.

Result: A Grand Slam! Strategy: NEED #1

Business Owned Life Insurance Policy

Stock Redemption Buy-Sell

NEED #2 Key Person

NEED #3 Proceeds to Corp. Corp. buys stock from estate

Executive Benefits Remaining proceeds to Corp. Pre-Retirement

Pre-Retirement death benefit for Employee

Post-Retirement

Post-Retirement: Benefits paid as agreed from Cash Value*; or remaining benefits paid from death benefit *Income taxable to employee or family.

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SUCCESSION PLANNING

Components of the GRAND SLAM: 1. When the number of stockholders in a corporation exceeds three, a Stock-Redemption Buy-Sell may be a viable option. In this scenario, the corporation has greater control over the transfer of stock among the stockholders, and owns life insurance on each stockholder to fund the redemption of the stock at the stockholder’s death or departure. 2. The success of a closely held business often depends on the talents of one or more key employees with specialized skills or knowledge. Insuring these key employees can help the business offset an interrupted or lost cash flow if the key employee dies or leaves, counteract any negative impact on credit and/or recover the expense of attracting and hiring a replacement. 3. To retain key employees, businesses frequently offer non-qualified retirement benefits in the form of “golden handcuffs” as an extra incentive to remain with the company. Executive Benefit plans can be effectively funded with the tax advantaged build-up of cash value in an insurance policy, combined with tax-free withdrawals (up to cost basis) followed by no-cost loans.

Advanced Markets Group | B U S I N E S S

Advanced Markets Group

Result: A GRAND SLAM! Each of these life insurance uses will first be considered by themselves — in baseball language — as a single. The need for Key Person coverage typically ends at retirement, while the use of policy values for benefit payments commences at retirement. That symmetry suggests that these benefits can be efficiently combined into one insurance policy — for a baseball double. The longer need for Buy-Sell coverage can be layered on top as an additional face amount — hitting a triple. Any residual death benefits remaining in the policy after the distributions have been taken will provide at least partial cost recovery for the business — covering all of its needs in one efficiently funded package — and that’s a Grand Slam!

Notes: 1. The Executive Benefit plan chosen will depend upon whether the business is an S or C corporation. C corporations can utilize either a Supplemental Executive Retirement Plan (SERP), which is entirely funded by the business, or a Salary Deferral plan where key employees defer a portion of their current income. These plans generally do not work for owners of an S corporation because of the “pass-through” of company earnings, but are effective for S corporation non-owner employees.

2. The Buy-Sell described above is a stock redemption plan (called “entity purchase” in businesses without stock) that assumes a C corporation with existing outstanding stock shares among its employee/owners. It works equally well for a partnership or an S corporation using the entity purchase approach, where the business owns life insurance on each key employee who will be “bought out” at retirement or some other triggering event.

Business-owned life insurance purchased on a key employee issued after August 17, 2006 is subject to the Pension Protection Act (PPA) of 2006. This allows tax-free death benefits to an employer provided the employer gives written notice to the key employee, prior to issuance of the policy, of the intent to purchase a life insurance policy insuring the key employee, and the key employee gives written consent to be insured and for the coverage to continue after the employee ceases employment. The employer is required, under IRC § 6039I, to annually report all employer-owned life insurance contracts on IRS Form 8925. 1

This information is for general education of producers and contains references to concepts that have significant legal, accounting and tax implications. It is not intended as legal, accounting or tax advice. Clients should consult with their own tax advisor regarding the application of these concepts to any particular situation. Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal government entity. Universal life insurance is issued by Sun Life Assurance Company of Canada (Wellesley Hills, MA) or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada (Wellesley Hills, MA), or in New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All are members of the Sun Life Financial group of companies. ©2008 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life Assurance Company of Canada. XMSD 44/697 SLPC 18622 03/08 Exp. Date 09/10 Page 2 of 2