Funding the future Retirement of a Business Partner

ABC Law Firm is a Mid-Sized, privately owned company with 4 Equity Partners varying in Age. Three of the partners are between ages 35-40 and the most senior partner, Bob, is Age 50.

The 3 younger partners realize that Bob most likely will retire before them. As a result, they will need to buyout Bob’s shares of the business in the future.

With the firm currently valued at $8 million, the other partners are worried about funding a future $2 million+ buyout.

Additionally, what happens if Bob dies and the buyout is required sooner than expected?

Lastly, what were to happen if Bob were to become disabled?

A Split Dollar policy can be used by ABC Law Firm to purchase a Life Insurance plan on Bob’s life that functions as:

1. Tax-Free Death Benefit used to fund a Buy/Sell in its entirety if Bob were to unexpectedly die
2. 100% Liquid from Day 1, Tax-Advantaged investment fund for a future buyout when Bob retires
3. A Long-Term disability insurance policy if Bob is not able to work0

• ABC is the Owner and Payor of an Equitable VUL COIL Life Insurance policy on Bob’s life
• Bob will name his wife as the Beneficiary of the policy’s $2 million Death Benefit and name ABC Law Firm as the Beneficiary of all the Cash Value in the policy
• Because each partner’s share in ABC is currently valued at $2 million, ABC purchases an Equitable VUL Life Insurance policy (please see attached) that has:

1. NO SURRENDER CHARGES beginning on Day 1
2. An Increasing Death Benefit

• No Surrender Charge on the policy means ABC can recoup 100% of their Investment, plus interest earned at ANY POINT IN TIME by simply surrendering the policy
  • The investment functions the exact same as investing money into a Brokerage Investment Account for the Firm
• ABC also chooses an Increasing Death Benefit. This is important because if Bob dies prior to retirement:
  • $2 million will be paid to Bob’s wife as a Tax-Free Death Benefit to fund the Buy/Sell of Bob’s shares in ABC
  • ABC will collect the Premiums paid into the policy plus the interest earned, as a Tax-Free Death Benefit

• In order to function as a 100% liquid plan from Day 1, the company should pay all of the premium in 7-10 years
• In this example (see attached illustration), we show ABC investing $60k/year into Bob’s policy for 10 years. This $60k annual investment is not Tax deductible to ABC
• As you can see on Page 7 of the Illustration, their annual investment is 100% liquid, plus have some gains, throughout the entire 10 years
• Each Year, Bob is required to pay an “Economic Benefit” Fee that is based on ONLY 3 factors:
• 1. Bob’s Age
  2. The Amount of Insurance Coverage
  3. One-Year Term Rate of Equitable (Please see attached for the rates per $1k of Insurance are attached to this e-mail)

• In this example, the 50 Year Old unisex One Year Term rate is 0.89 per $1,000 of Insurance Death Benefit
• • 0.89 multiplied by 2,000 ($2 million Death Benefit) would result in an Economic Benefit payment of $1,780

• • IMPORTANT NOTE – The Economic Benefit is NOT based on Bob’s Health Rate Equitable Approved him at, nor Bob’s gender

• In addition, Bob is in the 37% Federal Tax Bracket, he needs to pay $659 Tax on the $1,780 economic benefit
• HOWEVER, ABC pays Bob a $2,439 Cash Bonus (Fully Deductible to ABC) to cover his Economic Benefit and Tax payment so Bob has Zero out of pocket expenses

• If Bob leaves ABC, they will surrender the policy and take the Full Cash Value inside the policy back
• If Bob decides to retire at Age 70, ABC has now turned their $600k investment into a $1.27 million. They will use the $1.27 million to partially fund Bob’s buyout
• Or, ABC can make a deal with Bob to transfer ownership of the Policy (this is a Taxable Event for Bob)