Financial Planning. Does Your Business Have a Proper Buy/Sell Provision? Personal Financial Planning Advice from your FAMILY FINANCIAL ADVISOR

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1 Personal Financial Planning Advice from your FAMILY FINANCIAL ADVISOR Financial Planning Does Your Business Have a Proper Buy/Sell Provision? A so-called buy/sell provision is a key part of most business agreements. The term business agreement includes, depending on the legal entity of the business, a shareholders agreement, an LLC operating agreement, or a partnership agreement. When a business has multiple owners, sooner or later one of the following will occur: an owner s retirement, death or disability. What happens to an owner s interest in a business when an owner retires, is terminated, is disabled or dies? What, if any, restrictions are there for an owner to gift or bequeath his or her interest? Does the departing owner have to sell his or her shares to the remaining shareholders, and, if so, to which ones and in what percentages? Where does the money come from if the surviving owners or the business must purchase the deceased or terminated owner s interest? How should the purchase price and terms of payment be determined? If life and/or disability insurance are the funding vehicle for the purchase price, should the business or the owners, individually, own the policies? What are the tax and practical consequences of all the above? A wellcontemplated buy/sell provision will address these issues and provide answers. Think of a buy/sell provision as a roadmap (or GPS) to guide a business. Similar to updating the maps on a GPS, business owners should periodically review their buy/sell provisions. Citrin Cooperman Wealth Management, LP (CCWM) recommends you do this every 3-5 years. Certain events result in changes in a business that should, in turn, result in modifications of the buy/sell provisions. For example, there could be additional, or different, owners, anticipated future owners, an owner might be nearing retirement, or the value of the business may have changed significantly. The bottom line is that a small expenditure of effort and energy now can avoid confusion and/or costly litigation down the road. A buy/sell provision should also be reviewed in tandem with and in the context of an owner s estate plan. A buy/sell provision can override the owner s last will and testament, so it is vital that they work in harmony to properly reflect the owner s testamentary goals and intention. The financial advisors at CCWM can assist you with a comprehensive review of your buy/sell provision to determine how, if at all, it dovetails with your estate plan.

2 Insurance Creative Insurance Design Solutions and Underwriting Strategies 1. When is Universal Life Insurance Cheaper than Term Life? Underwriting for life insurance is often complicated. There are many nuances behind the scene. One example is that many carriers will give a better underwriting offer when a client (the prospective insured) purchases permanent life insurance, such as whole life or universal life (UL), rather than term insurance. This is because with term insurance, the carrier has a slightly greater risk of loss. Consequently, many clients that obtain a substandard rating (such as Table C or D) for term insurance can, especially if age 70 or younger, qualify for a standard rating for permanent coverage. Or, a client that is offered a standard rating for term can qualify for a preferred rating for permanent coverage. Frequently, by negotiating with multiple carriers, CCWM can get a better rating for permanent and thus design a UL policy as an alternative to a term policy. This is often cheaper, and better, than using actual term insurance. The policy owner, often a business, individual or trust, has a permanent policy, and thus need not worry about term policy conversion deadlines and restrictions if converting to permanent coverage (should the need arise). This can also make the policy more valuable than a term policy on the secondary market, should the owner desire to sell the policy. Here is a real life example: Recently, a CCWM client desired a combination of high cash value whole life Insurance, to be individually owned as a supplemental personal pension plan, as well as trust- owned term life insurance to support his wife and sons should he die prematurely. It was determined that a10- year guaranteed level term would suffice, as after 10 years the family expects to accumulate adequate wealth should the client die after the term insurance expired. Unfortunately, the client has several health issues, and of the three carriers to which we applied for the term insurance, the best two offers were a standard rating. All three are strong A rated and well known insurance companies. The cost for a 2 million dollar 10-year term policy for the client, age 55, was, at standard rates, $8,900 annually, or $89,000 in total premiums over the 10 years. We were able to persuade that carrier to offer a preferred rating for permanent insurance. This enabled us to creatively design a UL to act as a term policy. The client would pay premiums for 10 years whereupon, at current rates, the policy would lapse. The cost for the UL was $16,000 the first year and then $43,000 over the next 9 years, or total premium of only $59,200 vs. $89,000 for the true term policy!

3 A good insurance broker will not only fight hard for his or her clients, but will also think outside of the box. When considering insurance, it is vital to use an independent insurance professional with access to multiple carriers and allegiance to none. Also, especially for larger death benefit designs or clients with health complications, it is important to apply to multiple carriers. 2. Money-Saving Term Life Insurance Applications Make sure your term coverage suits your needs. Sometimes, simply purchasing a single 10 or 20- year guaranteed term contract is not in the policy owner's best interest. In some instances, term insurance is designed to cover a specific need for a particular amount of time. Here are several illustrative scenarios: Scenario One - A business desires so-called "key man" life insurance on a very valuable saleswoman, but only for the duration of her employment agreement, 3 years, after which she will retire. Scenario Two - A buyer of a business, as a condition of the purchase, must insure his life to guarantee payment of the purchase price. The promissory note the buyer signed calls for payments of $1,000,000 annually, for 7 years, but the balance due is to be accelerated upon his death. Upon the death of the buyer, the balance is due and payable in full. Each year, with each payment, the amount of debt decreases. Scenario Three - Clients gifted a family vacation house to a qualified personal residence trust (QPRT) and selected a seven year term. If they die within seven years, the full value of the house is subject to estate taxes. Term coverage for seven years is often an inexpensive way to hedge against the risk of premature death. In Scenario One, the readily apparent conventional option is level 10-year term. With this product the mortality charges are spread evenly over the 10 years, so the business would effectively be paying a higher cost of insurance for years in which it does not need the coverage, years A better option would be annual renewable term (ART). This is sometimes called yearly renewable term. It is renewed at the owner's option each year, and the premium increases each year due to the increased risk of death. In early years, however, the annual cost is much lower than the level premium of the 10-year term. Here is an example for the saleswoman, standard non-smoker, age 61: 10-year term - annual cost $3,749 x 3 years = $11,247 ART- year 1 cost is $2,964, year 2 is $3,575, plus year 3 cost of $3,895 = $10,434 In Scenario 2, the least expensive readily apparent option is to purchase a 10-year level term for $7,000,000 of death benefit. For the buyer, male age 50, standard nonsmoker, the cost is $14,020 per year. For seven years, the total cost would be $98,140.

4 A better option is to purchase seven separate $1,000,000 contracts of 10-year level term. The annual premium for each is $2,080. Each year one of the contracts can lapse to reflect the decrease in the debt. For example, the combined premiums in year 1 for all seven contracts are $14,560. A year later, for six contracts, the premium is $12,480. The cumulative premium for all seven years is only $58,240, which is considerably less than the single 10-year term policy. In Scenario Three, the best option is the conventional one, which is obtaining the shortest level term contract to cover the need, in this case 10-year level term. This is because the amount of coverage required does not incrementally decrease. Investments Many investors need or desire exposure to equities, but want to protect against what happened in the stock market in Consider an Equity Index Universal Life Insurance for a portion of U.S. large cap equity exposure. Equity Index Universal Life Insurance- is a relatively new insurance product that is very attractive to clients who desire a potential rate of return on cash value greater than that which is generally attainable with whole life or traditional (fixed) universal life insurance (where the premium dollars are invested in primary bonds). This is because the premium dollars are invested in a stock index fund, such as the S&P 500. Equity index universal life (EIUL) can be designed for maximum death benefit, which is generally attractive to an older insured and/or for trust- owned life insurance. The focus here, however, is employing an EIUL policy as a savings/investment vehicle. In other words, the contract is designed specifically for maximum cash value and a small death benefit. Thus, such a contract would not typically supplant a term life policy or other permanent policy where the insured also required a larger death benefit. EIUL is an alternative to a conventional equity/stock investment account. While it has a small death benefit component, EIUL is really a tax-efficient U.S. large cap equity investment vehicle. Many clients choose this as part of their equity exposure because it offers protection against loss. Loss would occur where the index dropped in value over a one year time, or over many years. An EIUL, for example, offers a floor, such as 1%, and is thus a safe investment strategy. No matter how poorly the stock index does in any given year, you policy owner is guaranteed a positive 1% gain (after expenses, including cost of

5 insurance, the return might be 0 or less). The carrier can do this by adding a cap, or ceiling, such as 12% (the carrier dictates the floor and the ceiling numbers). Thus, in the very good performance years where the index does better than 12%, the policy owner s gains are limited to the cap, and the carrier keeps the excess returns. Many clients like this as they can sleep better at night. Studies have shown that by adding the floor and the ceiling, two/thirds of the volatility is removed, as compared to simply owning the index outright. Note that these policies can be designed to have the least amount of death benefit possible and still qualify for life insurance, as defined under the tax laws, thereby obtaining tax-free growth, tax-free death proceeds and tax-free withdrawals/distributions (even above basis). The lower the death benefit, the lower the cost of insurance that is subtracted from the cash value. These contracts are popular as retirement savings vehicles because after the surrender charge period, the policy owner can access about 90% of the cash value, tax-free. The downside is lack of early flexibility due to surrender charges. Consequently, this is for long-term investors. Many of our clients, rather than devoting all their investment to a whole life product, will allocate some money to whole life and some to an equity index universal life policy. Additionally, many people own old and/or underperforming variable universal life (VUL) policies. While these policies allow for more investment options than an EIUL, there is no floor and thus no protection against investment loss. It might be prudent for a VUL owner to consider switching to an EIUL, or diverting future premiums to an EIUL. Many trustees also benefit from the downside protection offered by EIUL. CCWM can show you where an EIUL fits in to your investment portfolio. Not interested in receiving Citrin Cooperman Wealth Management communications anymore? Click here to unsubscribe.