Using Life Insurance in the Business Marketplace...•Jill 63 & Joe 66 (Married) Owner/Operators...

Presented By: Robert B. Wellendorf II, CLU®,AEP®, CAP®

EXECSO, Inc.Business Exit Planning

Omaha, NE

Using Life Insurance in the Business MarketplaceAugust 11, 2020

NAIFA NEBRASKA FORUM2020

BUSINESS | FAMILY | WEALTH | LEGACY | PHILANTHROPY

Key Learning Points

▪ Discovery, discovery, discovery

▪ Understanding life insurance as a tool to solve the ‘why’

▪ Importance of collaboration in the business succession planning marketplace

The Closely-held Business Landscape…

Despite 95% of the business owners affirming that “transition strategy is important”…

➢ 62% had given ‘limited’ to ‘no attention’ to their exit plans

➢ 71% had no written company transition plan and 43% had done “no planning at all”

➢ 81% had not established a formal transition team

➢ 72% had not accomplished any formal transition education

*EXIT PLANNING INSTITUTE (EPI) STATE OF OWNER READINESS REPORT,

2019 NEBRASKA

• Jill 63 & Joe 66 (Married) Owner/Operators

• ABC, Inc. - S-Corp, Ownership 90% - Jill and 10% Joe

• XYZ Investments LLC – real estate, multiple business and non-business properties

• Captive Insurance Company approximate value of $2 million; reserved capital invested in mutual funds

• Total net worth over $15 million

• 2 sons, 2 daughters and 8 grandchildren

• Owners would like to exit business within 2 years with no carry back note if possible

• Looking for exit planning guidance; open to possibilities of internal or external sale

• Oldest son interested in ownership and operations; not involved with the business currently and never has been

• Youngest son may want ownership and has very recently returned to be active again in the business

Case Example – Facts…

• High customer concentration risk with one company. This customer inquired about a succession plan

• $3+ million invested with financial advisor, qualified and non-qualified

• Have started 529 plan funding for grandchildren

• 2 individual life policies and a second-to-die policy currently in force

• Would like to treat family fairly and would like active son to earn or buy ownership

• Current estate plan shows children in equal shares. Unfunded irrevocable trust. Legacy goals

• Charitable intentions and family harmony; very important

• Have experienced advisors; CPA, life insurance professional, estate and business attorneys, investment advisor

• These advisors have never met each other

Client Objectives of Engagement

➢Maintain lifestyle / current income to continue to age 95➢Design and implement a successful business exit

strategy➢Provide legacy to children and grandchildren➢Maintain family harmony➢Make a “more significant impact” for charity(ies)

Objective: Maintain Lifestyle

Income Sources Identified:

401k Jill401k JoeIRA Brokerage Account JillIRA Brokerage Account JoeIRA Annuity JillIRA Annuity JoeLife Policy JillLife Policy JoeSurvivorship Life Policy – personally owned

Business Assets:Proceeds from the sale of ABC, Inc. – Deal Structure TBDCaptive Insurance Co more than likely will unwindXYZ, LLC – Owns the building and equipment used by ABC, Inc

Ongoing Income (& Legacy) Design

XYZ Inc. Rental

Captive Insur

Objective: Maintain Lifestyle

Life Insurance – ‘The Why’

Utilization of Existing Life Insurance PolicySecond-to-Die Universal Life

Life Insurance Design:Insured – Jill and Joe, Joint LifeOwner – Personally-ownedBeneficiary – Revocable Trust / Trust Beneficiaries are Four Children Equally Death Benefit - $3,100,000 Contract / Current DB in excess of $4.5 MMType – Survivorship Universal LifePayor – Jill and Joe – Annual funding has been up to as much as $152,500 based on owners’ cash flow (policy is currently in year 13)Use – provide annual income at retirement

Ongoing Income Design

XYZ Inc. Rental

Captive Insur

And Legacy

PARTICIPATION VERIFICATION QUESTION:

What percentage of Nebraska business owners surveyed

have a written succession plan?

A) 10%

B) 30%

C) 50%

D) 90%

Objective: Business Exit Strategy

Buyers Identified/Internal Sale:Key Employee – General Manager – Mike, Age 38Key Employee (son) – Project Manager – Jack, Age 34

Deal Structure Determined:Sale Price = $3,605,000Excludes Captive Insurance Company and ABC, Inc (building and equipment)Initial Payment Due at Closing = $350,000Balance of $3,255,000 payable over 3 years at 4.25% interestOwners carrying back entire note

Objective: Business Exit StrategyLife Insurance – ‘The Why?’

Placement:Key Employee – General Manager – Mike, Age 38Key Employee (son) – Project Manager – Jack, Age 34

Life Insurance Design:Insured – MikeOwner – JillBeneficiary – Joe and JillAmount of Death Benefit - $2,000,000Type – 10 Year Term with Conversion*Payor – Joe and Jill / approx $3000 Annual

* The premiums paid could be part of the deal structure.

Looking ahead – policy could be sold to new owners, and they could convert them to permanent insurance and use for supplemental retirement income, OR to fund their buy/sell.

Insured – JackOwner – JoeBeneficiary – Joe and JillAmount of Death Benefit - $2,000,000Type – 10 Year Term with Conversion*Payor – Joe and Jill / approx $3000 Annual

Objective: Legacy and Charitable Planning

Life Insurance – ‘The Why’

Placement:$5,000,000 Second-to-Die

Life Insurance Design:Insured – Jill and Joe, Joint LifeOwner – Irrevocable TrustBeneficiary – 50% to Four Children in Separate Trusts / 50% Donor Advised Fund Death Benefit - $5,000,000Type – Survivorship Indexed UL*Payor – Irrevocable Trust through Annual Gifting and/or Promissory Note

* Premiums could be financed based on client net worth and financial position

Leveraged Planning Solutions - Illustrated

Year 25, Ages 91 & 88Out of pocket is approximately $1 Million Leveraged to $4.1 Million

Policy Year

Annual

Premium Annual Loan

Out of Pocket

Premium

Death Benefit

Net of Policy

Loans Loan Balance

Annual Loan

Interest

Policy

W ithdrawls or

Loans

Out of Pocket

Interest

Surrender

Value Net of

Policy Loans

Surrender

Value Net of

Collateral &

Policy

Assignments

Death Benefit

Net of Policy

Loans &

Assignments

1 $321,691 $321,691 $0 $5,000,000 $321,691 $25,193 $0 $25,193 $117,897 -$203,794 $4,678,310

2 $321,691 $321,691 $0 $5,000,000 $643,381 $35,386 $0 $60,579 $398,875 -$244,506 $4,356,619

3 $321,691 $321,691 $0 $5,000,000 $965,072 $53,079 $0 $113,658 $698,469 -$266,603 $4,034,929

4 $321,691 $321,691 $0 $5,000,000 $1,286,762 $70,772 $0 $184,430 $1,017,926 -$268,836 $3,713,238

5 $321,691 $321,691 $0 $5,000,000 $1,608,453 $88,465 $0 $272,895 $1,358,616 -$249,837 $3,391,548

6 $321,691 $321,691 $0 $5,000,000 $1,930,143 $106,158 $0 $379,053 $1,754,768 -$175,376 $3,069,857

7 $321,691 $321,691 $0 $5,000,000 $2,251,834 $123,851 $0 $502,904 $2,175,317 -$76,517 $2,748,167

8 $321,691 $321,691 $0 $5,670,786 $2,573,524 $141,544 $0 $644,448 $2,621,122 $47,598 $3,097,262

9 $0 $0 $0 $5,804,183 $2,573,524 $141,544 $0 $785,992 $2,789,769 $216,245 $3,230,659

10 $0 $0 $0 $5,945,862 $2,573,524 $141,544 $0 $927,536 $2,986,831 $413,307 $3,372,338

$2,573,524 $2,573,524 $0 $927,535 $0 $927,535

11 $0 $0 $0 $3,416,142 $0 $2,573,524 $923,486 $923,486 $3,416,142

12 $0 $0 $0 $3,461,797 $0 $0 $1,010,757 $1,010,757 $3,461,797

13 $0 $0 $0 $3,509,095 $0 $0 $1,102,208 $1,102,208 $3,509,095

14 $0 $0 $0 $3,557,708 $0 $0 $1,197,433 $1,197,433 $3,557,708

15 $0 $0 $0 $3,607,330 $0 $0 $1,295,873 $1,295,873 $3,607,330

16 $0 $0 $0 $3,657,420 $0 $0 $1,397,022 $1,397,022 $3,657,420

17 $0 $0 $0 $3,707,346 $0 $0 $1,500,302 $1,500,302 $3,707,346

18 $0 $0 $0 $3,756,843 $0 $0 $1,605,184 $1,605,184 $3,756,843

19 $0 $0 $0 $3,808,077 $0 $0 $1,711,719 $1,711,719 $3,808,077

20 $0 $0 $0 $3,861,091 $0 $0 $1,819,156 $1,819,156 $3,861,091

25 $0 $0 $0 $4,136,636 $0 $0 $0 $0 $2,360,130 $2,360,130 $4,136,636

PARTICIPATION VERIFICATION QUESTION:

In our case study, how many children do Jill and Joe

business owner have:

A) 1

B) 2

C) 4

D) 8

Objective: Family Harmony

Resources:In-force Second-to-Die; DB approximately $4MM (currently used for income)New Second-to-Die; DB approximately $5 MMAnnual Charitable Giving (historically around $85,000 per year – information from 1040 Schedule A)

Design:Established a Donor Advised Fund (DAF) at the local community foundationNamed as 50% beneficiary on new second-to-die life policyFunded initially with $50,000 cash

Use:Facilitated family meetings regarding charitable giving; 2x per year

Client Objectives of Engagement:

❑ Maintain lifestyle / current income to continue to age 95

❑ Design a successful business exit strategy

❑ Provide legacy to children and grandchildren

❑ Maintain family harmony

❑ Make more significant impact for charity(ies)

Attorney

CPA

Commercial

Banker

Investment

Advisor

Commercial

Insurance

Broker

Life Insurance

Professional

Financial

Planner

Employee

Benefits

Provider

Business

Owner &

Family

"We keep families together by helping

effectuate your wishes and desires now, which eliminates them from

being subject to interpretation later.”

Presented By: Robert B. Wellendorf II, CLU®, AEP®, CAP®

9802 Nicholas St., Suite 375, Omaha, NE 68114

402-991-1700

rwellendorf@execso.com

EXECSO.com

BUSINESS | FAMILY | WEALTH | LEGACY | PHILANTHROPY

Q & A

BUSINESS EXIT PLANNING

Depending on Time –

May have this ‘call to action’…

Business Succession Planning and ‘Getting it Right’

What IS at stake?

What is at stake?

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About 118 if you

are counting