1. A Prenuptial for Business Owners
Buy-Sell Planning
A Prenuptial for Business Owners
Purpose and Scope of this Presentation. This presentation is intended to provide individuals with a general understanding of the Buy-Sell Planning concept. Any figures, costs, fees, or other numerical representations are for example purposes only. Any individual interested in this concept should consider his or her particular circumstances, and should seek advice and guidance from his or her own professional counsel.
You may not use this presentation to solicit new or existing clients. Failure to comply with this request is a violation of securities laws. If you are not a registered representative or if your broker/dealer does not have a selling agreement with Manulife Financial Securities LLC, please contact your nearest Manulife Financial sales office to receive information on becoming licensed and/or obtaining a selling agreement with Manulife Financial Securities LLC.
This material is for informational purposes only. Although many of the topics presented may also involve tax, legal, accounting, or other issues, neither The Manufacturers Life Insurance Company (U.S.A.), Manulife Financial Securities LLC nor any of its agents, employees, or registered representatives, are in the business of offering such advice. Individuals interested in these topics should consult with their own professional advisors to examine tax, legal, accounting, or financial planning aspects of these topics.
Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life Insurance
Company and are used by it and its affiliates including Manulife Financial Corporation. Copyright The Manufacturers Life
Insurance Company (U.S.A.). All rights reserved. MLI Expires 12/31/2002.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.

2. Why do you need a buy-sell arrangement?
To plan for changes in business ownership, retirement, death, or disability.
Sometimes businesses, like marriages, do not pass the test of time and a disagreement between owners may result in the end of a business.
A buy-sell arrangement can prevent the loss of business that owners worked so hard to create.
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3. Best Type of Arrangement
The best type of buy-sell arrangement depends on the situation
Several factors:
Type of business
Number of owners
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4. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Two Arrangements
The most common types of buy-sell arrangements are:
Entity Purchase
Cross-Purchase
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5. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Entity Purchase
AKA “stock redemption.”
Agreement among the owners and the entity.
The entity agrees to purchase (or redeem) the business interest of the departing owner.
The owners agree to offer their interest to the entity upon death, retirement, or disability.
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6. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
The Tax Perspective
An entity arrangement with a C-Corporation will not increase the basis of remaining shareholders’ stock.
Redemption can be taxed as a sale rather than a dividend.
Taxation as a sale is beneficial because only the gain is subject to tax at the capital gains rate.
At death the beneficiaries likely will not report a gain – because the deceased shareholder’s estate receives a step-up in basis.
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7. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
The Disadvantages
The remaining owners will not receive a step-up in basis in their remaining shares when the entity redeems the interest.
Life insurance will be subject to the claims of corporate creditors.
State law may prohibit the sale if the business is insolvent or lacks capital.
Premium payments are not deductible.
Life Insurance received by a C-Corporation can cause a 15% Alternative Minimum Tax (AMT).
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8. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Cross-Purchase
The owners are obligated to sell their interest to each other.
The business is not part of the arrangement.
The purchase of the interest will increase the purchasing owner’s basis.
No potential AMT taxes.
Likely no capital gains taxes at the death of the owner because the stock receives a step-up in basis to reflect the fair market value.
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9. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Trusteed Arrangement
Cross-Purchase plan for more than three owners.
Trustee purchases life insurance on each of the owners.
At death the trustee collects the insurance proceeds and purchases the business interest from the estate of the deceased shareholder.
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10. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
The Dilemma
Transfer for value
It is uncertain whether this type of cross-purchase avoids the transfer for value problem.
The death of the shareholder could be construed as causing a transfer of the deceased shareholder’s beneficial interest.
IRS has not ruled on this.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.

11. Partnership Arrangements
Similar to trusteed cross-purchase plans
Shareholders form partnership instead of creating a trust.
Partnership purchases a policy on each owner.
Should avoid transfer for value problem.
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12. Buy-Sell Funding Methods
Life insurance.
Borrowing funds.
Sinking fund.
Installment purchase.
Remember, a triggering event will often be something other than death.
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13. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Life Insurance
Most common method.
Cost effective.
Predictable amount of cash available upon death.
Policy’s cash value may be enough to fund a buy-out prior to death.
Sometimes done on a split dollar basis.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.

14. Borrowing, Installment or Sinking Funds
Borrowing or installment
May cause a strain on cash flow.
Sinking Fund
May result in taxes on investments.
Retained earnings.
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15. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Valuation of Business
Important and often overlooked – how to value the business.
Common ways
Fixing the purchase price
Book value
Capitalization of Earnings
Cut-throat
Combinations of above
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16. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Fixed Price
Periodically fix by arrangement
Pros
Simple
Cons
Often fail to adjust price for changes in value.
If not adjusted, unfair to selling shareholder.
IRS may disregard the actual selling price and attribute a higher value.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.

17. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Book Value
Determined on date of death or close of last fiscal year.
Pros
Simple
Cons
Seldom an accurate reflection of value
Reflects depreciated historic values
Ignores earnings potential
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18. Capitalization of Earnings
Value determined by multiplying earnings by capitalization factor.
Pros
Most effective if business value remains constant.
Cons
Earnings can be manipulated.
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19. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Cut Throat
Determined by the shareholders at the time of the sale.
Pros
Used in lifetime sales.
Cons
Often favors the shareholder with the deepest pockets.
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20. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Combination
Formula method.
Usual sale is based upon book value and capitalization of earnings.
Pros
Mitigates the disadvantages of the other techniques.
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21. The IRS’s View on Valuation
In order for the valuation to be binding, there must be a bona fide business arrangement.
The agreement must fix a way to determine the price.
The terms must be comparable to an arms length transaction.
The arrangement must not be a device to transfer assets to family members at a discount.
The agreement must meet the requirements of IRC Section 2703 (listed above) in order for the valuation to be binding for estate tax purposes.
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22. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
MLI SolutionsSM
Buy Sell Module
Complete valuation module
Computes all the common valuation techniques.
Contains over 400 SIC codes for common industries.
One of the only systems available today.
Illustrates
Cross-purchase
Entity
Partnerships
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23. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Summary
“A well-drafted and adequately funded buy-sell arrangement is an important piece of a business owner’s succession and estate plan. Without a buy-sell arrangement a business owner can lose much of the equity he worked a lifetime to create…with appropriate buy-sell planning, happy endings can be achieved.”
-Randy Zipse
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24. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
For more information on Buy-Sell Arrangements, please contact your local Manulife Financial Representative or call the Advanced Markets Group at
(888) , option 3.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.

25. FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.
Buy-Sell Planning
A Prenuptial for Business Owners
The End
The End
Manulife Financial and the block design are registered service marks and trademarks of The
Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife
Financial Corporation. This material is for informational purposes only. For more detailed
information please contact your advisor. Manulife Financial or any of its agents, employees,
or registered representatives do not give legal, tax, investment, or accounting advice. The
information given here is merely a summary of our understanding of the current laws and
regulations. Prospective purchasers should consult their tax advisor.
FOR BROKER/DEALER AND GENERAL AGENT USE ONLY.