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August 24 2022

Will a Business Owned Buy-Sell Life Insurance Policy Increase the Value of a Descendant’s Business Interest?

Situation: One of the chief concerns for owners of a closely held business is what will happen to the business if one of the owners can no longer continue. Surviving owners generally want to ensure a continuity of ownership and management without having the departing owner’s successor thrust upon them. Disabled or deceased owners want their families compensated fairly for their business value and, where applicable, they want this value to be respected for estate tax purposes.

I suspect that, as experienced practitioners, we have all stated that a properly drafted buy-sell agreement will address all the above goals by:

Providing that upon the occurrence of specific “trigger events,” owners are assured that their interest in the business will be purchased;
Providing that an owner’s interest must be sold to the company, the remaining owners, or a combination of the two; and
Establishing a valuation formula that will help ensure the family is compensated fairly and be respected for estate tax purposes.

Equally important to having a properly drafted buyout agreement is making sure the continuity of the business is not compromised by requiring buyout payments/terms that significantly burden the business. Neither the surviving owner(s) nor the departing owner wants to unduly compromise the continuity of the business by requiring payments that create a burden. Consequently, many buy-sell agreements are funded, in whole or in part, by life insurance on the lives of individual owners.

Solution: Life insurance is a tidy solution for funding a buy-sell agreement when it is available and affordable. However, it is important to think through the implications of life insurance from a valuation perspective when the business is the owner and beneficiary of the policy. In a prior publication of Counselor’s Corner we discussed the importance of complying with the IRC § 101(j) notice and consent requirements under the employer owned life insurance rules. In this article we will discuss how life insurance proceeds received by the business may impact the valuation of a deceased owner’s business interest. However, before we discuss the impact life insurance proceeds may have on the valuation of a business, it’s helpful to review the rules regarding how a buy-sell agreement can “fix” the estate tax value of a business.

Continue reading our print-friendly PDF here!

August 16 2022

Case Study – Business Insurance

A situation recently came across the desk of our advanced planning attorney that illustrates the distinct DBS advantage: we have the advanced resources that work for you and your clients!

SITUATION
A business owner wanted to set up a deferred compensation plan funded with life insurance for three people involved in the business but 2 of the 3 individuals were not insured. One was a 100% owner of pass-through business so it did not make sense for her because of the double taxation involved but wanted to make arrangements for the other two.

The question very clearly became: How can we proceed with one uninsurable when carriers do not permit a substitution of insured?

SOLUTION
The solution was to combine two plans with the cash value of one policy. We insured the young insurable on a split dollar basis. We then added a key person portion so if the young person died before the older uninsurable’s retirement a portion of the death benefit would go to the business to fund his retirement. The balance would go to the young person’s family under the terms of the split dollar.

If the younger lived, the policy cash value was sufficient to create income under a deferred comp for the older while also sustaining the policy to either start a deferred comp for the younger or continue as split dollar.

Problem solved with flexibility added.

View print-friendly PDF here.

August 15 2022

Diversified Brokerage Services Announces AppVantage

Diversified Brokerage Services Announces AppVantage, an Application Fulfillment Service to Simplify Life Insurance Sales for Advisors

Minneapolis, MN – Diversified Brokerage Services (DBS) has launched AppVantage, a new life insurance application fulfillment service that gives financial professionals an easy, streamlined approach for their life insurance sales. AppVantage differentiates itself from other application fulfillment platforms in the industry by including permanent policies on the offering; term cases can be fulfilled through the DBS FASTerm platform.

“We know that advisors sometimes avoid life insurance as part of their practice because they think the process can be long and cumbersome depending on the case,” explains Kurt Fasen, DBS Sales & Marketing Executive. “We’ve taken that out of the equation by building the AppVantage platform that offers hassle-free, complete application fulfillment.”

When using AppVantage, advisors simply refer their case to the AppVantage Team to complete the application process, and the team steps in to facilitate everything until the coverage has been placed in-force. AppVantage has the potential to save advisors hours of time as they secure needed life insurance coverage for their clients.

“With DBS AppVantage, financial professionals can save considerable time as they allow our team to step in and complete the process for them,” adds Leah Mahoney, DBS Director of Operations. “At the same time, they can feel confident that our AppVantage Team will give their clients the same, high level of service that they’d expect from their personal advisor.”

AppVantage is currently being offered at no additional cost to the advisor and allows advisors the same access to the wide variety of products and carriers already offered through DBS, including the accelerated and lab-free options. Advisors can also maintain access to their dedicated back office DBS team, including DBS advanced markets and in-house underwriting team.

“Our goal has always been to make life insurance easy and more profitable for the advisors we serve,” explains George “Chip” Van Dusen, DBS President & CEO. “This new offering is a perfect reflection of that goal. It also shows our commitment to high quality service and the advisor experience; it really is a win-win for advisors.”

To learn more about this complimentary service visit their website.

About DBS

Diversified Brokerage Services is one of the largest multi-carrier brokerage general agencies in the United States specializing in life insurance. With a national headquarters located in Minneapolis, MN, DBS supports financial professionals nationwide as they look to secure life insurance, long-term care, linked benefits, disability insurance and annuities for their clients.

July 29 2022

A Business Does Not Need to Die At the Death of a Key Employee

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Businesses are born when the market has a need and someone has a great idea for meeting the need. A product or service is developed and offered to the public. Over time, the skill, knowledge, leadership, and experience of the business’s key people make it possible for it to grow and produce a profit.

But what would happen to the business if death or disability prevents a key person from returning to work? Would the business continue to run smoothly or would projects be stalled, customers lost, and productivity reduced? Studies indicate that four out of every five businesses that suffer the loss of a key person will go out of business within three years. Today with many businesses already suffering a loss as a result of closure due to COVID-19 many may need to close their doors immediately at the death of a key employee! Consequently, financial advisors should be asking all their business owner clients, especially today, what would happen to their business if their key employee was not able to return to work. The following discussion is background information on key person life insurance coverage.

July 22 2022

Owner and Beneficiary Designations on Buy-Sell Arrangements

CASE STUDY

Situation: One of the most frequent questions posed to DBS’s in-house Advanced Marketing Attorney by financial representatives concerns the appropriate owner and beneficiary designation of a life insurance policy for a business buy-sell arrangement. Frequently, business owners want their business paying the premiums and they mistakenly believe that this means the business needs to be the owner of the policy. Sometimes the business owner wants to accomplish two insurance goals, a personal and a business need for coverage, with one policy by having two beneficiaries on a policy. Unfortunately, when life insurance is purchased to help with the funding of a buy-sell agreement mistakes happen. Furthermore, it may not be possible to simply change the owner or beneficiary designation with a carrier owner/beneficiary change form.

July 15 2022

Don’t Let Splitting the Business Split the Family

In many family-owned businesses, the commitment and contributions the children make is not equal. Sometimes this is because the older siblings come into the business earlier and carve out their place. They are often resentful of younger siblings who enter the business later expecting to be treated equally when they haven’t “earned their stripes.” Sometimes the resentment comes from children who went away and worked in different careers, but still expect to receive an equal share of the business. So, what is a parent to do?

Estate Equalization Solution

When parents find themselves in such a position, often the solution is to divide what they have equally, or at least fairly, among children. That might seem fair, but how can this be done if the business makes up the largest portion of the parent’s estate? Even if the business is not the largest portion of the estate, what happens if the assets intended to “equalize” the estate go down in value as has happened over the past several months? What will happen if something happens to the parent before the values are restored? It is not unusual for issues like this to break families apart.

Fortunately, the solution may be very simple . . . use life insurance to help “equalize” and stabilize the value of the assets going to the non-business heirs. Indeed, life insurance can be a strategic and valuable supplement to an overall business transition plan.

How do you Know if Estate Equalization is Right for your Clients?

Business transition strategies are never one-size-fits-all. Estate equalization strategy may be appropriate for your business clients who answer yes to the following questions:
Would you like your business to remain in the family, managed by a family member?
Are younger generation family members active in the business?
Do you have other family members who are not involved in the business? And do you want them to share in your estate?
Is it your intent to have your heirs inherit “equal” shares of your estate?
Would you need to split the business and pass part of it to heirs not active in the business to accomplish your goal of passing equal inheritances to your heirs?
Would you like another source of funds, other than the business, to provide for your spouse or heirs who are not active in the business?

With proposed changes in estate tax legislation making planning for the future more challenging, life insurance continues to do exactly what it was designed to do . . . serve as the foundation of a family’s financial security.

How Can DBS Help?

DBS can help you approach your business owner clients and find ways to implement life insurance solutions. Not only do we have the in-house expertise, but we also have entered into strategic partnerships with consulting groups like Kalamath Consulting Group (KCG). KCG is the leading Exit Planning consulting firm focused on helping business owners benefit from their life’s work through the creation of an Exit Plan based upon their objectives. Contact us today to learn more!

June 30 2022

Senate Committee Advances its Version of SECURE 2.0

On June 22, 2022, the Senate Finance Committee advanced provisions that form its version of what has been called SECURE 2.0. The House passed its version in a bipartisan 414-5 vote in late March. Both bills aim at increasing retirement savings and expanding availability and participation in employer sponsored retirement plans. There is optimism that the House and Senate will be able to iron out the differences in their proposals before the end of the year.

Read more to view some of the key provisions of the Senate bill.

June 23 2022

NonQualified Executive Benefit Arrangements

DBS wants to stand by its goal of making life insurance easy and more profitable for YOU, the advisor. That’s why we’ve created a number of tools and resources to help you better understand the topics. Take a look at our comparative summary of life insurance-based executive compensation plans for a better understanding of the similarities, differences and nuances.

View Chart

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June 16 2022

Private Split Dollar as a Buy-Sell Premium Payment Strategy

Situation: Financial advisor called DBS concerning a situation involving a family business where only one of the owner’s three adult children was involved in the business. As is typical with business owners, a significant portion of the owner’s estate was the value of the business. The advisor was struggling with how to provide an “equal” estate division between the child involved in the business and those who were not. The advisor was aware that the business heir could acquire insurance on the parent(s) so that funds would be available to help the heir buy-out the siblings’ interest. The advisor was concerned with the business heir being able to afford the coverage cost because the owner was not in “great health.”

Problem: It is not unusual for business owners to delay planning for the continuation of their business. They are always busy working in their business and need to be reminded of the importance of working on their business. An owner’s change in health can be a wake-up call. If coverage is available, the issue becomes how to structure the life insurance premium payments so that the business heir can afford the payments.

Solution: When the issue becomes how to structure the life insurance premium payments so that the business heir(s) can afford the payments financial professionals are quick to suggest that the parent(s) can make gifts to the business heirs. Such a solution is simple but may meet with resistance because it does not treat the other heirs equally. It may be possible to bonus the heir additional compensation, but this may also meet with resistance. One way to overcome this objection is to suggest the parent(s) use private financing as a way to pay the life insurance premiums.

Private financing, also known as self-financing or private split dollar, is the funding of life insurance premiums through a personal loan. . . in this case a loan between the parent(s) and the business heir. Unlike premium financing which involves a third-party lender, with private financing the parents act as the lender; there is no need for loan origination fees, collateral deposits, or significant increases in premiums to account for the required loan repayment. The private financing technique can be an attractive alternative to paying life insurance premiums. Following is how private financing works:

Parents and business heir(s) enter into a loan agreement and buy-sell agreement.
Parents(s) loan an amount equal to premiums for a life insurance policy on the parent/business owner’s life.
The business heir(s) pay loan interest based on the appropriate Applicable Federal Rate (AFR). Annually the parents report the interest as income.
Usually, the loan is repaid at the death of the insured out of the insurance proceeds, although the loan may be repaid earlier.
The loan amount repaid to the parent’s estate is divided between the heirs according to the terms of the parent’s estate plan.
After repaying any loan amount outstanding to the parent’s estate, the balance is paid to the business heir(s) to help buy-out the business interest inherited by the non-business heirs.

Unlike the gift of premium payment, with the private financing strategy the loan repayment ultimately restores the parent’s premium advances so that this amount can be distributed “equally” as part of the parent’s estate plan.

How DBS Can Help

To learn more about how private financing can be used to help achieve the goals of your clients, call Terri Getman, JD,* CLU, ChFC, RICP, AEP (Distinguished), DBS’s advanced sales resource.

*Not in the practice of law.

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June 16 2022

DBS Announces the Addition of Mike Cronbaugh to its External Sales Team

Diversified Brokerage Services (DBS) is excited to announce that Mike Cronbaugh has joined the team as a National Insurance Specialist, effective Monday, July 11, 2022. Mike will be reporting to Chuck Anderson, National Sales Director, and will be working with RBC advisors and sales desk personnel, presenting planful insurance solutions for RBC clients.

“We are delighted to have Mike coming onboard to join our RBC Virtual Point of Sale Team, joining Kevin Laing, RBC Relationship Manager and our RBC Sales Team with Jim Boldischar and Bill Brauer,” explains Anderson.

Mike’s insurance career began in 2001 at Prudential as a Retention Representative. Fielding calls on the surrender line, clients were genuinely appreciative of his attentive style in informing them of ways to access cash in their policy rather than surrendering it. In 2002, Mike moved to RBC Wealth Management as a Life Insurance Consultant. In this role, Mike was responsible for providing continuous communication, service and support of insurance sales and marketing efforts with RBC financial advisors, with a primary focus on strategic, administrative, and processing support of life, long-term care and disability income insurance business.

After 18 years at RBC, life changes demanded Mike obtain a position where he could work remotely, and in 2020 he accepted a position with Capitas Financial as an Internal Sales Consultant. There, he supported eight point of sale professionals, providing illustrations, case design, marketing materials, and application assistance. His move to join the DBS sales team brings him back to working with RBC associates once again.

“Mike’s strong life insurance expertise, combined with 20 years of experience working with RBC advisors makes him an ideal addition to our team,” adds Laing.

Mike works from his home office in Grand Rapids, Minnesota. In his free time, Mike enjoys entertaining friends and family, whether on the pontoon, in the kitchen or behind the bar. Mike also enjoys traveling and visits Kona, HI frequently, spending time hiking, hitting the beach, and searching for the perfect Mai Tai.