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Digisign buy sell agreement

[Music] like to thank you for joining me for this section talking about using life insurance to fund the buy sell agreement i think this is an area that we you know kind of gets overlooked in the buy cell uh planning and if you start looking at how do we you know utilize life insurance and why do we use life insurance i think part of the big big issue here is when we get into the discussion of how are we going to pay for a departing partner how is that going to be you know basically this is where the cash flow is going to be leaving either the business or it's going to be paid out by the surviving partner whatever that is we need to make sure that we're using the cash in in the best way possible part of the problem that we come across is you know we really don't have a crystal ball so the buy sell agreement can be triggered today could be triggered 20 30 years from now whatever that is and whenever that timing happens we could really get different answers on what the best method would be for funding the buy sell agreement but we don't have that crystal ball so we have to you know be you know forward thinking and have options but i think it's one we need to make sure that our our clients are aware of what these options are if you start looking at the the typical way to fund a buy sell agreement is installment payments i think every buy sell agreement i read you know installment payments are a big part of that clients are always asking can we create some things that are tax deductible well yes we can use consulting agreements it's deductible to the business but that departing partner now has to pick that up as ordinary income as that money's received and finally we have life insurance now the the big elephant in the room is always is life insurance too expensive and if you really start looking at what life insurance can do i think the answer is no it's a great way to leverage um those payments that are going to happen in the future and i think the best way to do this is let's go through a case study so if we have two equal partners bob and sally you know bob 40 sally's 50 uh each own 50 of this company it's it's worth 2 million dollars and the current tax rate will just use for bob and sally's 40 so let's start looking at what are the payment options for for bob and sally if the buy sell gets triggered and so the first part of the case study let's look if there's no life insurance and we go back to our default of using installment payments those installment payments are going to be paid out monthly over 120 months or 10 years 7 interest and so let's start looking at that and so bob is going to end up buying sally out and if we are doing this over 120 months bob has to earn 16 255 dollars per per month or 195 000 and change per year over a 10-year period bob has to earn 1.95 million and and why is that the case well bob has to pay taxes first at 40 percent in order to be able to pay sally or sally's heirs the one million dollars plus interest so if you look at that total total interest and principal is going to you know cost 1.39 million but to get that bob has to earn 1.95 million from the business so you start looking at that and one can bob generate that kind of money and two can the business generate that kind of cash flow and still support bob remember sally was you know 50 owner probably taking on 50 of the of the responsibility so that could be troubling for bob to do that let's look at it if we're using life insurance and we're going to use a policy design here so we've got a million dollars of death benefit for each partner we're going to pay 20 000 per year in annual premiums for each of the policies the policies are designed to build cash value so now let's look at what happens if sally were to die if sally died at age 50 so we're in year one of the policy well it cost us twenty thousand dollars in in that first year premium to generate that one million dollar death benefit not bad leverage but let's look at it you know if sally lives to age 55 we paid five years of premium or a hundred thousand out of pocket to cover that million dollar of death benefit if sally goes to age 60 this you know we were setting this policy up for for 10 premium payments and that 10 premium payments would guarantee our 1 million of death benefit so if we have that you know at sally at age 65 we've got the million dollars of death benefit but it only cost us 200 000 in premium so the question is is it affordable is the life insurance too expensive i think you can start looking at the the leverage that is here but we also know that there's other things that are going to happen in this case and because most of the triggers of of a buy sell agreement if you think about it are death the next one's disability and so if we start looking at that this policy on sally would have a terminal illness benefit so if sally's going to die within the next two years because of a terminal illness we can take a lump sum payment of 854 000 and change or we can trigger chronic illness which is similar to the long-term care benefits of 12 616 per month doesn't pay all of the payments that bob would have to do but it really starts to make sure that we have more options to cover those triggering events in the buy sell agreement same thing with critical illness we can take a lump sum out of this particular policy or for critical injury there again can we leverage what needs to be paid from from bob to buy sally out when that buy sell agreement is triggered now we've covered death we've covered disability what if sally just retires everything works out salary sally decides to retire at age 65. well we can look at the cash value that's built up in sally's policy and she's got cash value of 277 000 and change we can borrow or withdraw that from sally's policy but remember we also have bob's policy and in bob's policy there's because of his younger age there's 332 000 and change of projected cash value bob can reach in and borrow that money out and now take those two and pay sally you know it has a down payment for for the buyout agreement and bob would still have another 380 9502 left to pay her but now we we put that into the installment payments bob has 4522 left per month that is significantly less than than what he was looking at if he hadn't put the life insurance in place so if you start looking at how do we recap this well one what is best for the business both from a current cash flow standpoint and a future cash flow standpoint you know can the business sustain what needs to be taken out in an installment agreement or would it be better for the business and the owners to go ahead and purchase some life insurance and use that life insurance one if there's a death to be able to pay out that that partner or in essence the partners errors immediately or we can create that as in essence sinking fund with the cash value to be able to pay that out and create more opportunity for the for the surviving partner or in the business to be able to grow replace the departing partner and have the cash flow they need to carry forward so it really is one when you start looking at the at the funding of the buy sell agreement look at how life insurance can be a great asset to leverage those dollars appreciate you taking the time and we'll talk to you in the next next segment you