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I've got everybody on mute which is a little disadvantage for me because I can't hear what you're saying so there's a little chat box down there that if you'll just type in your questions because if you have questions I certainly want to address those when you have your question if I could hear everybody then everybody could hear everybody and it would be a cacophony of sound and it wouldn't work very well at all this morning we're going to be talking about buy-sell agreements this is basics a lot of you already know this it's not new information but it never hurts to go over again because there's a great deal of opportunity not only to make sales but to make friends in doing the buy-sell agreements besides that people expect you to know that how to do this so let's talk about it well maybe then maybe not there are two basic types of buy-sell agreements one is where the company buys the interest of the departed owner now I feed the part of the owner because sometimes we forget that this isn't all about death or disability this is this buy-sell agreement also prevails during the life leaving and their first is still alive and they want to leave and sell their stock back to the company too so that's going to be important we don't need that okay the next is going to be we're in under another individual usually it's a partner but could be another stockholder or an employee or even a competitor was file out the interest of a departing owner so those two basic types where you have an entity purchase and you have a cross purchase the engine purchase and sometimes called the stock redemption plan that could say corporation if you have an LLC it's a member not a stockholder but it's all works the same way it's the easiest plan to administer because we can everything actually comes back to the entity itself here's how it works and as we're going to be talking about invoking a buy-sell agreement due to a claim we're going to make the claim a death claim just for ease of conversation today so the insurance company has insurance policies on each of the owners the business pays the premium to the insurance company the business is the owner and the beneficiary of the policies on each of the owners so the agreement beers and agreement in the business with each of the owners they all sign off on it give me a bit of a claim we have a deceased owner obviously the stock then goes to the estate or the family however it's handled in his own last will and testament goes to the family the family then is required by this agreement to sell their stock to the business and an agreed price or an agreed formula and the business then has the money from the insurance policy to pay the family in exchange for the stock currently there's a step up the basis that is not a taxable transaction because all they're doing is exchanging stock worth X amount of dollars for cash in that same value now you'll note here that the stock of the deceased stockholder goes into Treasury stocks within the company it doesn't you distributed to the other stockholders and the stock itself is not canceled the Fockers can still considered outstanding shares but it's now owned by the corporation now these shares can be distributed again in the future maybe to attract another partner into the group maybe you're going to use it as an incentive plan for some type of warrants or something of that nature but the stock is still outstanding still considered issued but owned by the corporation now the other tactic is to have another individual own the policy and that individual then purchases the shares of the deceased stockholder that's called the cross purchase agreement here's how that works now I'm showing this with owner a and B because if just think about it we had four owners here and each one of them had to purchase an insurance policy on the other three owners it gets to be a list of policies and it becomes very confusing as to which policies premiums are due now did we pay that policy did we not pay that policy we paid this other policy did we pay that policy because very confusing that's why when you have multiple partners many times the option is to go to an entity purchase or a stock Redemption plan on a cross purchase so owner a has an agreement with owner B for his interest in the business owner B has the grandmas owner a for his interest in the business across purchase agreement they buy insurance policies on each other if they're about the same age and about the same underwriting category that's about the same premium assuming both on the same interest in the business but you can see that if you have a 60 year old Honore and a 40 year old owner be 40 year olds owner B is going to pay twice the premium for owner AIDS policy as owner a is going to pay for owner B's policy it's going to be a real difference in the cost of insurance at claim time on a cross purchase agreement the insurance company is going to pay the claim on in this case the deceased owner B their share of the stock went to their family owner is required by the buy sell agreement to buy those that interest in the company from the family or statum of owner be there again this is not a taxable transaction because we have a step-up in basis of death of that interest for the value of that interest the insurance company pays honor a tax-free death but it's an income tax free death benefit owner a exchanges the same value of the insurance as for the stock so the family doesn't have to pay income taxes on that owner Ellie didn't have to pay income taxes on that either one of the differences here though is that we have a change in basis in other words if owner a man at any point in time wants to sell the company teen if each of the owners interest had started with ten thousand dollars worth of investment and they had a ten thousand dollar investment but twenty thousand dollars together into the business and it had grown each of those investment had gone to a hundred thousand dollars the business is now worth $200,000 owner a now to death of owner B has a basis of ten thousand dollars and what he originally put in for his house and now he has a hundred thousand dollar basis in buying out owner bees interest in the business so if he sold his shares now at the business now for $200,000 he would only have a capital gains of $90,000 I think that's pretty clear the other is a wait-and-see by for greatness now most people believe that's what they have because I haven't done a buy sell agreement it's kind of why waiting in city if anything's gonna happen no that's not what I can say about buy sell agreement is they're going to enter into an agreement among themselves to buy each other's respective interest in the company but it doesn't the buy Stellarium it doesn't exactly specify who's buying what in exactly okay let me put a little copy all of this these purchases determined at the time of one of the departure of the owners and at this point I would say it's the death of one of the owners the funding structure of the agreement can look like any of these others if you look like an entity purchase or like a redemption plan it could look like a cross purchase plan or we could design it to be kind of a combination of both of these let me show you owner aims and honor be bottle policies on each other just like on a cross purchase okay we have the agreement in the business as a buy-sell agreement and but it's a wait-and-see buy sell yeah on the death of one of the owners the business has the first option to purchase the deceased owners ownership even the business doesn't exercise that option or allergist buys a portion of it then anything that's not exercised anything that's at left then the other owners have the option to purchase that interest if they don't purchase or if they purchase some of it not all of it or they don't purchase any of that then the business is required to purchase any excess so it's essentially an entity purchase with an option for the other stockholders our other partners to purchase that they decide to do that let me note something here if the insurance proceeds were paid to the other owners rather than to the business and the choice was to have the business actually by the deceased owners interest now these surviving owners have all this money from the insurance policies whether it supposed to do that other than go on vacation they can loan that money to the business so the business now has the money to purchase the shares of the deceased stockholder and now the surviving stockholders have a loan to the company which can be repaid back to the stockholders and not go through the Medicare if they're making over 250,000 they get the excess tax on their two that have investment income otherwise this was not keeps them from being this to be considered passive income but its passive income because it's a loan but they can get the money out of the business without it going through payroll so even if there was not money in the business to purchase the deceased shares the business could get the money from the other stockholders and then pay it back to them as long as a repayment of loan so there's a tax benefit to doing it that life okay here it is in for everyone that's right brain needs to see a picture of this okay owner a this time we're killing him so the static passes to his estate the business has the first option to purchase it if they don't purchase all of it or if they purchased none of it then it would go to the other owners and they have the option to purchase if they don't purchase or they only purchase a portion of that then the business must purchase the excess all right another kind a buy sell agreement now we all of us have heard of an entity purchased stock redemption we've all heard of cross purchase I'm not sure you've heard of wait and see or not but that's where the wait and see is this is called the trustee cross purchase agreement it's not even a trust okay so trusting is kind of a misnomer it's it's person really an escrow agent that they set up to manage the buy sell agreement to implement the agreement the stockholders give their stock certificates to the escrow agent they s custodian and then the custodian actually purchased the insurance he gives the money out of the business they pay the escrow agent the escrow agent purchases the insurance and is the owner and beneficiary of the insurance policies now how does the escrow agent have an insurable interest in in order to purchase the insurance the insurance for the escrow agent is actually established by the buy sell agreement naming him as escrow agent so that's how that works in underwriting so there's this obligation then by this agreement that the escrow agent is going to carry out the obligations of the buy sell agreement why would a person why would a company want to do that well I would say that you have ten doctors all will believe their God and their have a buy sell agreement together with their clinic well rather than finding all of the others fighting amongst themselves at the time of the claim and how it should be handled it's a lot easier to have the bank escrow agent or the corporate attorney or some third party then has by agreement been chosen to be the mediator and the administrator of the buy sell transaction essentially this escrow agent is going to be the custodian or transfer agent for the company for a small company so the escrow agent hides the insurance owns it it's a beneficiary and then at that time it's a because he's executing the buy sell agreement this is not a taxable transaction between the escrow agent and the owners when we have a the death of owner a in this instance these if the partners decided that they would not sign stocke powers early on and give it to the escrow agent because they didn't trust the escrow agent that much then the executor of the estate signs the stock power and gives it to the escrow agent who already has the stock certificates and works then to redistribute the deceased stock holders interest to the other stockholders and he gets the cash to pay the family okay what do we need to begin obviously we need the basic information for an insurance policy which would be the stuff you see on the screen also we're going to need the value of the ownership interest that's normally the biggest hurdle in coming together with the buy sell agreement and we have a couple of companies that have calculators that help to determine valuation which is a huge deal in making this work one of the problems that you run into is we have a new company that's a start-up and they've got four guys that came together they started this up January 1 2015 they want to put their business in order they want to get a buy-sell agreement written but they've got no business so to speak then they've got great hopes so how do you value keyman insurance how do you value the value of a new business that really has nothing at this point in time well in the buy sell agreement you can create a stated value in other words they've all put in $25,000 they've got $100,000 now to start the business with they're not taking and hardly anything out of the business at this point in time what's the value of the business well they can create a stated value maybe they already have contracts that they're going to work out over this year that's going to create revenues and everything else and the contracts are in place just the revenues haven't started you can create a stated value and you can proof it up for underwriting purposes in that way another way to do this on keyman insurance you say how much were they making it the other company let's show 2014 earnings and we'll say this is what the person's worth and even though they're not taking it out at this point in time this is we can establish that earning value of this person on the exit strategy why would we want to know about an exit strategy for this because if there's a lifetime exit strategy we may need to set up a sinking fund within the policies in order to execute a lifetime sale an inter vivos sale of the business interest or it may dictate what kind of insurance we're going to do if they say we're looking to sell the business in five or ten years maybe we need a 10 or 15 year term policy on here because you're always going to if they said we're going to sell the business of five years you would always sell a 10 year term on there they're gonna say we're going to have a business of 10 years you'll always follow at least 5 years more on the insurance just in case the timing isn't exact on 10 years because at the end of that period of time is when they you discover they've got cancer or there's something else that's a problem let's talk about the steps we have to go through first of all work with an attorney that's done this before this is not their first rodeo because they're going to need to help to set up the type and the structure of this agreement they're going to need to know how to structure within the agreement to this buyout formula or the price how often it should be reviewed they need to know what's going to trigger a a lifetime sale like a disability a resignation of bankruptcy that type of thing and if they're going to guarantees or secure the agreement if a non-compete needs to be put in there community property stays do we need the spouse's aside also there's a lot of involved here so it may be the best friend or their cousin but if they don't have experience in writing a buy-sell agreement probably want some money to hire somebody else next obviously work with an insurance agent that knows their stuff so that you can get first of all if there's an underlying problem what do we do I'm working on a case right now in Tennessee we insured two of the partners the third one his PSA has been going up on a regular basis he went to nine point six this last time so what do we do about something like that did you know that we have the possibility of writing term insurance ten-year term through Symetra on a person with current diagnosis of prostate cancer so I mean never think something can't be done on these situations so we're also going to need to know what's the best type of insurance what other alternatives should we use who's going to own the policies we need to set it up in good order so that it happens the way it's supposed to happen we see anybody any questions if I knew how to unmute this that would be helpful and otherwise if you'll type in questions I'll see if I can figure out how to get to that if you have a question type it in there is any questions there so let's go on and continue here's the question how do we download these slides can we get a copy of this presentation absolutely absolutely you send an email to you can send it to Michael here at MD Asheville at board hands up how are you send it to me at SR Asheville at Morgan hammock comm you know a lot of people think that I retired because we're doing this succession plan and it's not true at all but I'm kind of retired because I'm back to 40 hours a week so I always fight if I only work 40 hours a week it would be like being retired so it's kind of like this anyway let's go back to the slide show from current slide maybe okay repairing by self problems pre by snow problems in other words the person's called you up for and says you know we need to talk about a buy-sell agreement okay yeah yeah yeah requires you've got a problem how about this a former partner leaves goes into competition he's owns 20% of the stock right down to the competition still owns the stock because it wasn't by a sale agreement and demands to come to your annual meetings and see all your financials every year and what your lusion ears and your outlook is because he's a stockholder and he can demand to do that what did you do about that it's interesting because I've run into this and this is what one of the ways we've solved this problem we've got to get him out he just didn't want to sell out at this point in time what's in it for him who thinks your company is going to do really well you think your company is going to do really well but you've rather not have him participate in the growth of the company when he's out there running competition with you so consider this one say that he is 54 55 whatever when he starts his own company out there why don't we consider funding a non-qualified to think about this a non qualified retirement plan for him in exchange for his share of the business now you can pay less now your company can pay less now to create a much greater income stream later for this rogue partner by using a deferred income annuity now since it's in exchange for the stock the amount you pay into this deferred income annuity becomes the amount he's going to paying capital gains which is gonna be a lot less than the benefit he's gonna receive so that's all a bit he believes the stocks worth two hundred and fifty thousand dollars he said that came to our fifty thousand dollars and so you're offering twelve thousand dollars for it he says ha no thanks so you said okay you got nothing right now we may never sell the business we may just dump this business and start another one anyway so we'll pay you $100,000 now in a deferred income annuity that we'll pay you 25 thousand dollars a year starting at age say seventy five ninety seventy whatever you want to do and this guy and it will pain for ten years at twenty five thousand dollars a year now currently they've got nothing as a minority stockholder he's got nothing he's got great hopes and he's in the irritant but other than that unless he really enjoyed that he could get two hundred and fifty thousand dollars of benefit out of this and it's starting up a new business he doesn't have a retirement plan for himself it's all been said presto he would have a retirement plan for himself and you get him out another situation someone has become disabled but they saw me make income out of business even though their assets it's actually losing sales for the business so they're already disabled it's alright they fell disability insurance stone right now well you still need to get him out of the business because they're costing sales what do we do here well we write a buy-sell agreement now that even though it hasn't been written before the incident does it mean it can't be written out to address this issue so the disabled shareholder now can be written into this this plan and is more assured of an income in spite of the business operations because the remaining projects can actually selected another person to come in and make the purchase of a disabled shareholders interest because the disable turnover is nothing to sell you stock back for this income stream and now the disabled shareholders going to get a capital gains taxation on portions of those shares and no taxes on on his basis so he could take basis first on this and that way we make sure by now ensuring all the other shareholders that this mishap doesn't occur again they are willing buyers at this point in time they don't want to go down this road again and they certainly don't want to run into the problem of not having a buy sell agreement if someone dies the hospitals are filled with people that didn't believe they were going to be there a month ago so bad things happen at the worst possible time you can't keep bad things from happening but you can certainly make sure it's not the worst possible time that's why we do buy-sell agreements that's why we write insurance policies and you can't buy insurance when you need it you know once you've already had an event you're not insurable at that point in time you can't get a loan if you need the money you've got a triple think you don't need the money or you know that's why we we have our own provision in permanent policies it's speaking of that I know how to do this when should we be writing permanent insurance in on these business cases everyone thinks of a business case is being term insurance and they shouldn't let's look at some instances close to home here children in a succession plan case in point my children are pretty young why would I buy term insurance on them when even on key person insurance what I could buy permanent insurance and pay it up in ten years when their premiums are really when they're young it's just stop material it's just not material so absolutely children in this accession plan remember that if you have a succession plan set up and unless a family or employee or whatever it is in your successor dies the old owner is in a real spot good odds we've got the business back they didn't like that second insurability problems consider the companies that have table shaped programs the painful shaped programs are always with permanent insurance products so you may not actually be paying any more for permanent policy and a standard rate then you would for a rated turn policy at least it's certainly not with the difference also to partition the reserves of the company so they're not subject to the claims of creditors you think about this the bigger the payroll of any company the bigger their reserve account is why because whenever you can't make payroll you're out of business your company your employees don't understand where our big account was a slow player this month that's not their problem so a company always keeps their reserve account to make sure they can make payroll which is the biggest line item on their expenses normally anyway and so they have a reserve account there but that reserve account is always subject to claims of creditors if they're sued not in an insurance policy and we have policies that you can set up where the cash values at the end of the year are equal to or greater than the premiums paid so if you're going to buy keyman insurance which is a non-deductible item why don't we take a portion of the reserves and buy a single premium key man policy so that the cash values are there within the company protected from claims of the creditors and now we're no longer paying premiums on a key person policy with non-deductible premiums but we are actually creating key man policy from the internal interest in your reserve account it's pretty slick pretty thick also in anticipation of distributing policies of retirement so the shareholders have a if it's part of a repurchase agreement in other words when they retire our buy sell agreement says that we are repurchasing their shares they're interested in the company and a set formula or however it's not in the buy sell agreement well we can set up a sinking fund obviously right here we talked about this inter vivos sale this exits living exit strategy this is part of that and we would sell permanent insurance policy to make sure that we had funds available for that for that redistribution so is there any way I can open this up to questions let's see where is it okay sorry guys I'm learning here if the business owns the insurance policies can they ride off the premiums excellent question excellent question if the business owns the policies and the premiums are deducted and expenses the proceeds come in as taxable not as non-taxable now if you don't have an accountant that understands the difference they're going to throw all insurance premiums together as part of the benefit plan and they're gonna try to deduct at all at the point of a claim if the keyman insurance was deducted that means that the proceeds come in completely income taxable to the to the business which could set off a EMP it can set off a whole lot of problems in the event that they deducted the the premiums another question was do I recommend an attorney I try not to we can give you some names of attorneys but I don't want to stick my neck in the noose most of the time by just giving you one because sometimes if they don't perform on a timely basis I don't want to be the subject of that blame but I'll be glad to give a list if that's helpful all right that's all I have to say on this webinar thank you all so much for attending and if you have questions please call me my direct number is tu-144 204 102 it's tu-144 204 102 that comes directly to my desk I'll do my best to get back to you as quickly as possible thank you so much for being on the webinar