Types of Business Planning:


Buy-Sell Planning

A business continuation agreement is an arrangement for the disposition of a business interest in the event of the owner’s death, disability, retirement, or upon withdrawal from the business at some earlier time. Business continuation agreements can take a number of forms:

  1. An agreement between the business itself and the individual owners (either a corporate stock redemption agreement or partnership liquidation agreement), frequently called an “entity” plan;
  2. An agreement between the individual owners (a cross-purchase or “criss-cross” agreement);
  3. An agreement between the individual owners and key person, family member, or outside individual (a “third-party” business buy-out agreement); or
  4. A combination of the foregoing.

In the case of corporations, the most common types of business continuation agreements are stock redemption plans (often called stock retirement plans), or shareholder cross-purchase plans. The distinguishing feature of the redemption agreement is that the corporation itself agrees to purchase (redeem) the stock of the withdrawing or deceased shareholder. In a cross-purchase plan the individuals agree between or among themselves to purchase the interest of a withdrawing or deceased shareholder.

In the case of a partnership, an agreement similar to the corporate stock redemption plan is the partnership liquidation agreement, where the partnership in effect purchases the interest of the deceased or withdrawing shareholder by distributing assets in liquidation of his or her interest or the partners agree to cross-purchase similar to the corporate cross-purchase plan.

When is the use of such a device indicated:

  1. When a guaranteed market must be created for the sale of a business interest in the event of death, disability, or retirement.
  2. When it is necessary or desirable to “peg” the value of the business for federal and state death tax purposes.
  3. When a shareholder or partner would be unable or unwilling to continue running the business with the family of a deceased co-owner.
  4. When the business involves a high amount of financial risk for the family of a deceased owner and it is desirable to convert the business interest into cash as his or her death.
  5. When it is necessary or desirable to prevent all or part of the business from falling into the hands of “outsiders”. This could include a buyout of an owner’s interest in the event of a divorce, disability, or insolvency, if there is a danger a business interest would be transferred to a former spouse or creditors.
  6. Where it is desirable to lend certainty to the disposition of a family closely-held business.



Key Person Insurance

When taking inventory of assets, companies include buildings, computer equipment, and phones. In other words, companies value their tangible items- items that can be replaced if lost in a fire or some other type of disaster. One asset that is often overlooked is the human capital of the company. Each business, regardless of its size, has an individual or group of individuals who contribute to its success and without them the business would have a difficult time surviving. Like tangible assets, insurance protection can be purchased for those key employees.

What is it?

You can protect your business from the loss of a key person by implementing a key person insurance plan in which your company purchases and owns a life insurance policy on the life of a key employee. The life insurance policy will provide the company the liquidity needed to keep the business running in the event of the key employee’s premature death. The plan provides the cash needed to hire a qualified replacement and/or to purchase the additional human capital or assets necessary to keep the business operating. The plan may also help to replace lost profits as a result of the loss.


While the main purpose of key person insurance is to provide a death benefit to the business in the event of an unexpected or sudden death of an essential employee, it can also be used as a way to provide the key person with retirement benefits.


Key person life insurance is simple to implement. It does not need IRS approval and may include many people. With key person life insurance, the business has death benefit protection in case of a sudden and unexpected death, and is able to access the potential cash values of the life insurance policies for cash flow, retirement benefits, or for unanticipated expenses.

Restricted Property Trust


What is a Restricted Property Trust (RPT)? What are the objectives of an RPT?

The RPT is an employer sponsored plan for owners and/or key executives. The primary objective of an RPT is to provide tax favored long-term cash accumulation and tax free income distribution in a conservative vehicle. An RPT can provide better results than an alternate investment earning 8%.


What are the tax characteristics of an RPT?

Each annual contribution is fully deductible by the employer and only partially taxable to the participant. Asset growth is in the cash value of a life insurance policy and therefore is tax-deferred. The policy is distributed to the participant at plan termination, at which time a portion of the cash value is taxable.


How does an RPT achieve these results?

Fully tax deductible contributions are made by the business to an RPT for a select group of participants. Of this, a portion is considered current taxable income to the participant. The remaining contribution funds the life insurance and is not considered taxable income to the participant.

The RPT tax treatment depends in part on provisions of the life insurance contract and in part of the provisions of the trust. One key trust provision is that the employer must make the selected annual contribution each year for the restricted period. Failure to make the annual contribution causes both the policy to lapse and the surrender proceeds to be given to a pre-selected charity. This creates a critical “risk of forfeiture.” After the policy is distributed, the participant can maintain it for the death benefit, use it to generate non-taxable cash flow, exchange it for a larger income stream (annuity) or potentially exchange it for a larger, guaranteed death benefit.

Who can participate in an RPT? Are there limits on participation?

The plan is available to anyone with earned income, whether from a C Corp, an S Corp, partnership or other business entity. An RPT is not Qualified Plan, so participation limits and test do not apply, and contributions to an RPT do not impact any Qualified Plan contributions. Participants in an RPT can each select their own level of contribution regardless of what other participants contribute.


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