BUSINESS & EXECUTIVE SOLUTIONS
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An executive bonus plan (Section 162) is a way for business owners or companies to provide additional supplemental benefits to key employees or executives of their choice. The benefits usually include life insurance policy death benefits as well as cash value accumulations that can be used as a retirement income supplement. With an executive bonus plan, the business can use tax deductible company funds to selectively provide valued benefits to key people. An executive benefit plan, used effectively, can be a valuable tool to attract and retain key executives.
Executive bonus plans are simple in design and easy to implement. The executive bonus plan works as follows:
The company provides the key executive with a bonus that is taxable as income to the recipient. The bonus is generally a deductible business expense for the company.
The bonus is used to purchase a whole life or universal life insurance policy that builds cash value that grows tax deferred. Access to the cash surrender value is restricted by the company until a specific date.
The life insurance policy, if properly structured, may provide an attractive benefit to the executive in the form of cash value growth. Any cash value accumulation will grow tax deferred and may be accessed by the employee income tax-free through withdrawals and policy loans. The policy’s cash value can be used to supplement retirement income or for any other financial need.
If the key executive dies, in most cases, the heirs will receive the death benefit proceeds from the life insurance policy income tax free.
Whatever You Need
A buy-sell agreement, also known as a buyout, is designed to protect or continue a business should it experience an unforeseen circumstance. If a co-owner wants out of the business, to retire, to sell their shares to someone else, goes through a divorce or passes away, a buy-sell agreement acts as a sort of "premarital agreement" to protect everyone's interests, setting the price and terms for a buyout. These are binding contracts between co-owners that control when owners can sell their interest, who can buy an owner's interest and what price will be paid.
Buy-sell agreements can be used to lower estate taxes in businesses where at least one co-owner plans to leave the interest to heirs who will remain active in the business. This can help a family business owner pass the business onto children or other relatives without burdening them with unnecessary estate taxes caused by an aggressive value of the business. The key for estate planning is choosing a conservative price or valuation formula for the business in the buy-sell or buyout agreement. The result can be to legally set the value of the ownership interest at an amount considerably lower than its sales value at the time of death.
Most buy-sells are funded with life insurance because it is the only means of guaranteeing that death, the event which creates the need for cash, also, creates the cash to satisfy that need. Other alternatives are available such as borrowing or creating an installment plan, but life insurance is the most common.
KEY PERSON INSURANCE
Ensuring Your Protection
A life insurance policy that a company purchases on a key executive's life. The company is the beneficiary of the plan and pays the insurance policy premiums. This type of life insurance is also known as "key man insurance," "key woman insurance" or "business life insurance."
Key person insurance is needed if the sudden loss of a key executive would have a large negative effect on the company's operations. The payout provided from the death of the executive essentially buys the company time to find a new person or to implement other strategies to save the business.
In a small business, the key person is usually the owner, the founders or perhaps a key employee or two. The main qualifying point would be if the person's absence would sink the company. If this is the case, key person insurance is definitely worth consideration.