Category: Estate Planning

Can Your Business Survive the Loss of a Key Person? – Intrepid Law

You’ve likely protected your business with general liability coverage, property insurance, commercial automobile coverage, and workers’ compensation insurance. But for some businesses, operations would come to a grinding halt without certain essential contributors—key persons as we call them. If your business includes any key persons, key-person insurance should be a part of your business insurance planning.

What is a key person?

A key person is someone associated with the business that provides a significant, direct economic benefit. Economic benefit not only includes profits, but also considerations such as cost savings, goodwill, credit access, and customer access.

Business owners—particularly those of a small business—are often key persons. Some additional examples of key persons are:

  • A salesperson with well-established or numerous business contacts
  • An employee with specialized expertise
  • The inventor of the product
  • A programmer who wrote the foundational code
  • The owner with relationships that result in favorable credit terms

How does key-person insurance help?

Key person insurance compensates the business for any financial loss or cost incurred because the key person suffers an insurable event (death or extended disability).

1. Key person insurance provides financial security.

  • Key-person insurance can bridge the gap if the loss of the key person impacts the business’s revenue or affects the business’s creditworthiness.
  • If a buy-sell agreement is part of your business succession planning and the loss of the key person triggers a buy-sell event, key-person insurance (in the form of life insurance on each owner) funds the inside purchase of the deceased key person’s ownership interests, protecting both the remaining business owners and the deceased key person’s estate.

2. Key-person insurance buys your business time.

  • The cash injection key-person insurance provides can keep the business afloat while a replacement for the key person is recruited and trained.
  • If the key person is truly irreplaceable, key-person insurance can provide the funds that enable the business to pay its creditors, wind down the business operations, and dissolve.

Any other benefits to holding key-person insurance?

In addition to the peace of mind key-person insurance provides to business owners, the premium the business pays on key-person insurance may be deductible as a business expense. If proper notice and consent requirements are met, the proceeds from a key-person insurance payout may also be tax free. The tax implications of key-person insurance are complicated and specific to individual circumstances. It is crucial that you consult with your tax professional about this and other tax-planning strategies centered on key-person insurance before you purchase a policy or sign any documents.

Next steps

We work with businesses to evaluate business needs and goals to ensure that the overall business planning strategy is on target. If you are interested in learning more about key-person insurance and how it may fit into your business plan, please give us a call.

Retirement Planning for Business Owners

Retirement Planning for Business Owners

For many employees, saving for retirement is usually a matter of simply participating in their employer’s 401(k) plan and perhaps opening an IRA for some extra savings.

But, when you’re the owner of a business, planning for retirement requires pro-activity and strategy. It’s not just the dizzying array of choices for retirement accounts, there’s also planning for the business itself. Who will run the business after your retirement? Additionally, your estate plan must integrate into your retirement and business transition strategy.

Owners of businesses (like employees and everyone else) want to make sure they will have enough money in retirement. Business owners recognize the value of their businesses, so they are often tempted to reinvest everything into the enterprise, thinking that will be their “retirement plan.” However, this might be a mistake.

Retirement Accounts for Business Owners

Rather than placing all your eggs in one basket, it makes sense to have some “backup” strategies in place. There are many retirement account options open to business owners. Although the number of options can make things confusing, a tax and financial professional can often quickly make a recommendation for you.

For example, you may consider opening a 401(k), SEP-IRA, SIMPLE, or pension plan. This can reduce your income taxes now, while simultaneously placing some of your wealth outside your business. From a financial perspective, these account are tax-deferred, so the investment growth avoids taxation until you retire, which greatly boosts returns. The “best” plan really depends on how much income your business earns, how stable your earnings are, how many employees you have, and how generous you want to be with those employees. You must consider how generous you’ll be with employees because the law requires most tax-deferred plans to be “fair” to all employees. For example, you can’t open a pension or 401(k) for yourself only and exclude all of your full-time employees. When making this decision, consider that many employees value being able to save for their retirement and your generosity may be repaid with harder work and loyalty from the employees.

Depending on how many employees you have, you may even consider “self-directed” investment options, which can allow you to invest some or all of your retirement funds into “alternative” investments, such as precious metals, private lending arrangements, real estate, other closely held businesses, etc. These self-directed accounts are not for everyone, but for the right person, they open up a wide world of investment opportunities. The tax rules surrounding self-directed tax-deferred accounts are very complex and penalties can be incredibly high. So, if you choose to do self-directed investments, always work with a qualified tax advisor.

Outside of your business, you can likely contribute to an IRA or a Roth IRA. This can allow you to add more money to your retirement basket, especially if you’ve maximized your 401(k), SEP, or SIMPLE plan. Like the other tax-deferred accounts, self-directed IRAs are also an option, opening up a broad world of investment options.

As a business owner, you likely have a great deal of control over your health insurance decisions. If you’re relatively young and healthy or otherwise an infrequent user of health care services, consider using a high deductible health plan (HDHP) and a health savings account (HSA) to add additional money to your savings. These plans let you set aside money in the HSA which can be invested in a manner similar to IRAs. At any time after you setup the account, you can withdraw your contributions and earnings, tax-free, to pay for qualified medical expenses. And, after you turn 65, the money can be used for whatever purpose you want, although income tax will need to be paid on the distributions.

Selling or Transferring the Business

Many business owners dream of a financially lucrative “exit” when a business is sold, taken public, or otherwise transferred at a significant profit for the owner. This does not happen by accident – a business owner must first create and sustain a profitable enterprise that can be sold. Then, legal and tax strategies must be coordinated to minimize the burdensome hit of taxes and avoid the common legal risks that can happen when businesses are sold. When a business is sold, the net proceeds can form a significant component of the owner’s retirement. When supplemented by one or more of the retirement accounts discussed above, this can be a great outcome for a business owner.

On the other hand, other businesses are “family” businesses where children or grandchildren will one day become owners. Like their counterparts who will sell their businesses, these business owners must also focus on creating and sustaining a profitable enterprise, but the source of retirement money is a little less clear. In these cases, clearly thinking through the transition plan to the next generation is essential. Although the business can be given to the next generation through a trust or outright, there are also transition options to allow for children, grandchildren, or even employees to gradually buy-out the owner, if the owner needs or wants to obtain a portion of the retirement nest egg from the business.

The Importance of Estate Planning

Regardless of which retirement accounts (401(k), SEP, SIMPLE, IRAs, HSAs) you select, it is wise to integrate them into your estate planning. You’ve probably already considered who you want to take over your business after you retire (perhaps a son or daughter or a sale to a third party). For your retirement accounts, an IRA trust is a special trust designed to maximize the financial benefit, minimize the income tax burden, and provide robust asset protection for your family. These trusts integrate with the rest of your comprehensive estate plan to fully protect your family, provide privacy, all while minimizing taxes and costs.

Leverage the Team Approach

Let us work with you, your business advisors or consultants, your tax advisor, and your financial advisor to develop a comprehensive retirement, business transition, and estate planning strategy. When we work collaboratively, we can focus on setting aside assets for retirement, saving as much tax possible, while freeing you to do what you do best – build your business!

Give us a call today so we can help you craft a retirement, business transition, and estate planning strategy.

Estate Planning: 3 Reasons We Run the Other Way

Estate Planning: 3 Reasons We Run the Other Way

We understand that it feels hard to get around to estate planning; it sounds about as fun as getting a root canal. However, we also understand that we all want to make sure that our loved ones are protected and receive our hard-earned assets – regardless of whether we have $10 million or $10,000.

Don’t let these common roadblocks stop you from protecting yourself and your family:

  1. Who Wants to Talk About Death? Discussions of death, dying, and illness – money and family – will and trusts – make many folks uncomfortable. Of course, that’s normal.  But, don’t let a few minutes of feeling uncomfortable stop you from taking care of yourself and your loved ones.
  2. This Isn’t a Good Time. Everyone is busy. We understand that, but there’s never going to be a better time. Call our office, get on the calendar, and get it done.
  3. I Don’t Get It. Estate planning is documented in legal papers; finances are discussed; the law is analyzed. It’s common feel uncomfortable in a world you’re not familiar with.  If that’s what you are thinking, you are not We will translate complex legal concepts into everyday layman’s terms for you, just like we do for everyone else.

The truth is that estate planning isn’t really that bad. In fact, with our help, estate planning is easy. We’ll chat with you about your goals and concerns, analyze your family and financial situation, and work with you to come up with a solid plan. You provide the information, which we always keep confidential, and we’ll take care of everything else.

Today We Honor Those We Will Never Forget

In honor of September 11th, a day that we will never forget, Intrepid Law is introducing a non-profit program to benefit current and past first responders.  Our new program offers free wills and other estate planning documents to first responders and or their spouses during the month of September.  Contact us for more information!

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Important Estate Planning Info That You Should Know

Regardless of your financial situation or family size, you need a comprehensive estate plan that handles the distribution of your assets and legacy wishes if you become incapacitated or upon your passing. Most people will revise their estate plan many times during a lifetime. Here are the most common reasons to update an existing estate plan.

A New Spouse

If you have recently gotten married, you have probably already included your new spouse in your health and life insurance policies, but you should also update other areas of your estate plan. Do you have a prenuptial agreement with your current spouse, kids from a former marriage, or assets that you own with another person? If you answered “yes” to any of these questions, your assets may not be designated to your spouse after your death if your estate plan is not updated after marriage. To ensure that your new spouse is protected in the event of your death, you need to thoroughly review your existing estate plan as soon as possible.

The Birth or Adoption of Children

The birth or adoption of a child can change everything. From the amount of money that you spend each month to your nightly sleeping habits when a child comes into your life, your world is sure to be turned upside down in some way. Just like your life will significantly change upon the birth of a child, your estate plan should also change. Depending on how your existing estate plan is composed, you may need to add your child as a beneficiary of your policy. As your child slowly grows in age, you should alter your plan to make sure that your assets will be distributed in a way that you think would be appropriate. For example, when your child is a minor, your estate plan should name a guardian who will care for your child upon your death. On the other hand, when your child becomes an adult, you may want to set up installments so that your loved one receives money at certain intervals or ages.

An Unexpected Divorce

While certain states and federal laws may prohibit your former spouse from receiving an inheritance once you and your significant other parts ways, you should still update your estate plan when your divorce is finalized. Following a divorce, you might need to change any beneficiary designations, powers of attorney authorizations, and health insurance spousal coverages. In fact, it’s a good idea to review your entire estate plan during this life-changing event to ensure that your former spouse is not included in your will.

The Death of a Loved One

Life is often unpredictable and, as a result, there may be appointed people in your estate plan who will pass away before you. When a death of a loved one unexpectedly happens, you will need to designate a new guardian, power of attorney, executor, or health care proxy as soon as possible.

A Substantial Change in Assets

The purchase of a big asset, a generous salary increase, and the loss of a good paying job over a prolonged period are all considered significant changes in assets. When any of these types of situations occur, you must alter your current estate plan immediately. If you have a big estate, there will likely be disputes over the distribution of your assets if there is not an updated plan upon your death.

A Move to A New Country or State

Whenever you move to a new country or state, most expert estate planning attorneys would advise you to draft a completely new estate plan that reflects the legal requirements in the location where you have chosen to reside. If you plan to live abroad, as an American, your estate plan will require professional assistance.

An Expert Estate and Trusts Attorney in St Louis Can Help You Determine Which Items to Update in Your Estate Plan

During the course of your eventful life, protecting yourself and your family should be your primary focus. If you would like to learn more about ways to properly prepare for the future, visit our estate planning page here. Once you have finished reading this important information, remember that an estate planning attorney St. Louis is always ready to help you build a great estate plan. Contact us today and let us help you!