R&R Insurance Blog

Policy ownership is the number one issue when it comes to taxation. Having the policy set up incorrectly could mean the difference between a Tax-Free Death Benefit and a Taxable Death Benefit.

Buy-Sell Agreements
Every business should have a continuation plan, either in the form of a Buy-Sell Agreement or via will. It should specify what would happen with their ownership if they died, were disabled, or wanted to retire. Typically, these agreements are drafted as Cross Purchase Agreements or Entity Purchase Agreements. Most businesses fund these agreements with Insurance, but how that insurance is owned will make a big difference in terms of taxation.

S-Corp vs C-Corp
Whether you own an S-Corporation (LLC) or a C-Corporation, having the insurance owned by that entity could seriously affect the tax treatment of the death claim. Not only do you possibly trigger a 15% Alternative Minimum Tax (AMT) on the death benefit, but you could also be increasing the value of the business at the worst time, your death. Plus, the loss of step-up in basis to the surviving owners could be even more devastating. Allowing us to review those policies, and determine the correct ownership structure can alleviate any worries, and ensure your insurance is set up in the most efficient way.

Personal Policies & Estate Planning
Currently, in 2017, each individual has a lifetime exclusion of $5.49m. Anything over that amount gets taxed at 40%. Keep in mind, this is subject to change and most likely will change going forward. Which is why having a plan that provides flexibility is essential. Even if your estate is not over that exclusion amount, you may still want to consider having your policy owned by an Irrevocable Life Insurance Trust (ILIT). An ILIT will provide creditor protection as well as outline how you want the money handled in the event you pass away and your spouse remarries.

Don’t wait until it’s too late! Contact Pat Driscoll or Tom Driscoll for a complimentary review of your policies.

Many high net worth business owners are going to be impacted by the Federal Estate Tax – a rate that is higher than the highest Income Tax Rate. It’s a 40% tax on any assets exceeding the Unified Credit level. The IRS has two “Trump Cards” to play that can push you into that tax bracket.

Personal or corporate-owned life insurance can unintentionally bump the values of their estates at the worst possible time – death. The second and potentially even more damaging trigger is pegging the value of their business. They may be operating with the notion that Book Value will be the accepted method used by the IRS. It typically is not. Some combination of Book Value and Capitalization of Earnings is a far more likely method.

Imagine what would happen if your business suddenly had to continue without you, a partner or key employee. The death, disability or retirement of a key executive causes a number of problems which can be addressed with proper planning.

Through R&R, you can make sure that you are covered in case the unexpected happens. Please contact Tom or Pat Driscoll to get more information on R&R's business valuation services and more.  

If you retired, died, or became disabled yesterday, who would own and manage your business today? Would you want your business interest retained for a family, sold, or liquidated? According to The Virtual Assistant, there are four ways to fund a buy-sell plan at an owner's death:

1. Cash Method

The purchaser(s) could accumulate sufficient cash to buy the business interest at the owner's death. Unfortunately, it could take many years to save the necessary funds, while the full amount may be needed in just a few months or years.

2. Installment Method

The purchase price could be paid in installments after the owner's death. For the purchaser(s), this could mean a drain on a business income for years. In addition, payments to the surviving family would be dependent on future business performance after the owner's death.

3. Loan Method

Assuming that the new owner(s) could obtain a business loan, borrowing the purchase price requires that future business income be used to repay the loan PLUS interest.

4. Insured Method

Only life insurance can guarantee that the cash needed to complete the sale will be available exactly when needed at the owner's death, assuming that the business has been accurately valued.

Click here to learn more about the Buy-Sell services provided by R&R Insurance Services.

Are you and your company prepared for the un-timely accident to one of your owners?

If liquidation is forced on a disabled business owner or on the executor of a deceased business owner, it can quickly become public knowledge that there is pressure to dispose of the business, and these results can be anticipated:

• Sale of business assets at greatly reduced prices.
• Elimination of the disabled business owner's or surviving family's primary source of income.
• Sacrifice of any goodwill value that might have facilitated sale of the business as a going concern.
• Difficulty in collecting accounts receivable.
• Immediate demand by creditors for settlement of their claims.
• Possible liquidation of other estate assets to pay business debts.

The liquidation value of a business is unpredictable and may be substantially less than the value of the business as a going concern.

In some situations, the liquidation of a business interest at an owner's death or disability may not be just an appropriate decision. It may, in fact, be the only possible outcome under either of these circumstances:

• The success of the business is completely dependent on the personal skill and experience of the owner.
• There is no successor management in the form of a capable family member, a co-owner, a key employee interested in purchasing the business or an outside buyer.

In these circumstances, the question becomes, "Will the liquidation take place on a forced basis, or will it be planned in advance to allow for the most advantageous disposition possible?"

When liquidation of the business at an owner's death or disability is the only viable alternative, the primary objective should be to plan in advance for an orderly liquidation that results in the greatest possible value for the disabled owner or surviving family.

Contact us for more information on properly protecting your business.

Nationally known attorney Steve Parrish, recently released an article on Forbes.com describing the dangers of selling your family business back to your family – and what it could potentially cost you. Like any sale of a business, the devil is in the details. What looks like a straightforward sale to a child can create unforeseen taxes and can spin the family into acrimony and discord.

In the article, Steve addresses the potential tax traps associated with an intra-family sale. One of the most crucial elements you, as a business owner, face is the ultimate distribution of your business. Will it be sold to a third party or family member, or will it be passed to a family member via a will or trust?

Typically, your business is the focal point or hub of the estate. You may have a somewhat distorted view of how the IRS would value it. At R&R Insurance, we offer a Business Valuation that will provide an analysis of the 5 methods most used by the IRS. This is a complimentary service provided to you.

Many businesses have not explored a Business Continuation Agreement. We also provide a complimentary service where a group of attorneys and CPAs will thoroughly review any documents you have. This same group of advisers will then put together the Business Valuation Plan.

In addition, R&R will provide you with an analysis of any insurance programs (both business and personal) that may support your continuation plan. Is the coverage set-up properly to avoid any unnecessary taxes? Is it performing up to the expectations from when it was purchased? These are all questions we can answer.

Please feel free to contact Pat or Tom Driscoll if you have any questions.

In the 2014 budget, the President is looking to raise estate tax rates and lower exemptions that applied in 2009. While nothing is finalized yet, Jonathan Forster & Jennifer Smith provide interesting opinions on the potential impacts of the proposed budget: Weighing The Obama Budget's Impact on Estate Planning.

Under the President's proposal, as of 2018 the top estate, gift, and GST tax rates would return to 45% (up from 40%), the estate and GST tax exemptions would revert to $3.5 million, and the gift tax exemption to $1 million (all down from $5.25 million). In their opinion, this would make lifetime gift planning more complicated for wealthy families and closely-held business owners who want to transfer ownership to their family members.

Additionally, this year's budget would only tax property transferred to trusts through sales or similar transactions that are "disregarded" for income tax purposes under the grant trust rules. The potential impact: even in its more restricted form, passage of this proposal would adversely affect planning with grantor trusts.

The Obama administration wants to terminate a trusts' GST-exempt status on its 90th anniversary and subject the trust assets or subsequent distributions to GST tax. Potential impact: this would limit the long-term tax leverage afforded by GST exempt trusts and a family's ability to preserve wealth over time.

The Administration would also limit the availability of the GST exemption to qualified transfers made directly by a living donor and not through trusts. Generally, direct payments to medical care providers or tuition for another person are gift and GST-tax exempt. The potential impact, in their opinion, is that it would affect all non-exempt trusts, not just HEETs.

Now is the time to make the contact Pat Driscoll and take advantage of current estate planning laws.

All of the printed information and major news telecasts have addressed the "what" as it relates to the American Taxpayer Relief Act of 2012. Of greater importance to people, specifically higher net worth business owners, is the "now what do I do?"

There are many moving parts with this new law. An article by NFP explains possible income and estate tax strategies to consider under the new law. Major tax changes:

Health Care / Payroll Taxes

• 3.8% Medicare tax on net investment income
• 0.9% increase in Hospital Insurance (HI) tax on wages
• 2% increase in Payroll taxes

Income Taxes

• 39.6% top income tax rate
• 20% top rate on long-term capital gain and qualified dividends
• Expanded retirement planning
• Personal exemption phase-out and limits on itemized deductions

Transfer Taxes

• Higher rates
• Same exemption, inflation-adjusted
• Reunification and portability made permanent
• State estate tax deductions

Further explanation and example strategies.

I have spoken with many business owners and we work together to create the best strategy for their organization and their personal finances. Please contact me to discuss the best strategy for yourself.

The "fiscal cliff" of 2012 relates only to tax aspects meaning many additional topics are still up for debate. Below is a brief explanation of what the American Taxpayer Relief Act does and does not do:

What the Act does:

• Increases tax rates for high-income taxpayers
• Increases top estate, gift, and GST tax rates
• Makes other estate, gift, and GST tax provisions permanent
• Extends / implements certain retirement planning options
• Addresses other expiring tax and health care provisions

What the Act does not do:

• Many tax issues were not discussed and remain of concern to the taxpayer: expiration of the payroll tax cut, health care taxes having significant impact, and transfer tax issues may remain.

Summary of Income Tax Provisions

Where do we go from here? Tax preparation and analysis will be more crucial than ever. For questions and help with tax planning strategy, please contact me.