BUSINESS SUCCESSION & FAMILY LEGACY: KEEPING THE DREAM ALIVE Preserving Your Hard Earned Family Wealth & Creating a Legacy Presented by Freedom Broker Services, LLC

Business Succession Planning for:  Partnerships  LLC’s  Sub Chapter S Corporations  Sole Proprietorships

Questions Lead to Answers  What is the most overlooked and underfunded liability facing closely held businesses and partnerships?

 Do you have a buy-sell agreement?  Is it funded?  When was the last time it was updated?  What is important to you about your money? Questions Lead to Answers

Three Key Components to the Buy-Sell Discussion 1. What happens when my business partner dies? 2. What happens if my business partner becomes disabled? 3. What happens when my partner wants to retire?

What is important to you as the business owner ?  Who is important to you?  Do you want to create a legacy?  What about the next generation? Business growth, the future?

Involving Other Professionals  A team approach is often needed in this type of planning (as with many other types of planning )

 Banker  Financial advisor  Attorney  CPA Who are the Team Members?

Why do I need to involve others?  Attorney and CPA are crucial to the success of the plan  They facilitate the process (Buy-sell agreements, power of attorney, etc.)  Funding these risk exposures is a logical and efficient way to complete the plan Involving Other Professionals

 Peace of mind for the business owner  Funding early death need with Life Insurance  Funding disability need with Disability Income Insurance  Funding buy-out need with Disability Buy-Sell Coverage  Pre-funding retirement buy-out/exit strategy What could result from this type of team discussion?

Waiver of Premium Rider The Waiver of Premium Rider adds significant value to your Life Insurance funding solution.  Make your Life Insurance Plan self-completing in the event of disability  Insurance company pays your premium to keep your Life Insurance coverage in force  Policy can be converted to a permanent cash value generating contract  Cash value builds to supplement your retirement plans

Waiver of Premium Rider: How it Works Imagine a 45 year-old business owner becomes disabled at age 46…. - He purchased a $1,000, year term policy to fund a buy-sell with his partner paying premiums of $1,500 per year - Insurance company implements the Waiver of Premium Rider and pays ALL future policy premiums to keep the $1,000,000 in force - Insurance company allows for FULL CONVERSION to a Whole Life contract with a premium of $15,000 per year - The cash accumulation in the new policy by age 65 is $500,000 yielding a $30,000 per year tax free income stream at age 66 to the disabled business owner

 Business valuation is important to establish for both the business owners as well as the insurance company extending the coverage Business Valuation

Business Valuation Methods 1. Book Value Method 2. Book Value plus Value of Goodwill 3. Straight Capitalization Method 4. Book Value plus capitalization of excess earnings Business Valuation Methods

 A great starting point as the business owner is to determine what you would sell the business for to a competitor? How much is my business really worth? Business Valuation Methods

Types of Agreements  Cross Purchase  Entity  OPPO Trust (ie. one policy per owner)

Cross Purchase Agreements allow for a step up in basis for the surviving partner.  Ex. A business is originally capitalized with a value of $1,000,000  Over the next ten years, the business grows to a value of $5,000,000  The Buy Sell Agreement is executed assuming the current value of the business is $5,000,000 and funded with $5,000,000 of life insurance  With a Cross Purchase Agreement in place, the surviving partner has a new basis of $5,000,000 and has paid 0 Capital Gain on the difference between the original business value and the current value. This saves the business owner approximately $1,000,000 in taxes from the ultimate sale of the business (assumes a 20% capital gain tax) The Tax Advantage of a Cross Purchase Agreement

Cross Purchase Agreement

What else is important in the Succession Planning process?  Estate equalization  Key-person  Trans-generational planning  Business continuity

Estate Equalization  Who gets left out of the closely held business, family business, family farm?  Who are the heirs? Who is most important to the business owner or family farm?  Is there a son or daughter in the business? Are there other kids off to Med school, Law school, the Army?  How not to disenfranchise? Estate Equalization

 Who is your #1?  What talent or skill do they have that is irreplaceable?  What happens to the business if they go down, i.e. long term disability or death?  Double Jeopardy: ad hoc payments to a disabled business partner or key person (section 105 of IRS code)  How does good planning soften the blow?  Does your Key Person have an interest in purchasing the business? Key Person

Trans-Generational Planning  Do your sons or daughters have an interest in maintaining and running the business at some point in the future?

Business Continuity & Legacy Planning  A third generation business needs cash flow for continuity: - Maryland’s inheritance tax is 10% of the estate- do the heirs of the business or family owned farm have the liquidity to pay that?  What about Estate Taxes?

T.E.A.M. Together Everyone Achieves More

Thank you! Headquarters Freedom Broker Services, LLC Crystal Rock Drive Suite 211 Germantown, MD O: F: Contact Freedom Broker Services Today A plan for generations to come.