Jim created a service business and grew it into a successful firm generating $10M/year in revenues. A few years after college, his son Scott realized the gem that Dad had created and joined the team. He quickly learned the trade, showed his ability to be a great leader and the family began to prepare for his taking on full ownership and management of the firm on Jim’s retirement.
They contacted our firm looking for ideas and strategies of how best to fund Dad’s ‘exit’ which was targeted to occur in about 12 years.
They wanted best ideas around using current business dollars to help fund Dad’s buyout while minimizing the impact to the company’s profits.
Their stated desires for the strategy:
- A funded ‘exit’ plan for Jim/Dad.
- Tax deductions.
The Strategist’s Recommendations & Implementation
As the key executive for the firm there were two needs we identified for Jim and his son:
- Funds needed to help with the buy-out in 12 years.
- Funds for Mom in case Dad were to kick-up daisies early (buy-out of Mom’s share)
The solution implemented:
- A $150K fully deductible Restricted Property Trust (funded with life insurance) on Dad.
The business Buy-Out plan took care of their needs up to Jim’s retirement, creating a $4M+ benefit for Mom if something were to happen, as well as creating tax-favored funds for his exit.
In the 11th year, the life insurance policy rolls out of the Trust and becomes wholly owned by Dad. Tax efficient business dollars were used to fund the buy-out and we created a pool of funds that Dad can now use, income tax-free, during retirement. What they received:
- Tax-Efficient Dollars used for Buy-Out. The business legitimately ‘writes-off’ 100% of the $150K of contributions made to funding of the Restricted Property Trust policy each year. Dad takes a 30% ($45,000) current income inclusion on contributions made each year.
- Family Protection: If Dad were to pass early, the death benefit proceeds from the Restricted Property Trust would pay off Mom’s interest in the company, providing her with financial peace of mind.
- Personal Pension: At retirement, Dad and Mom have not only his 401k plan but also a strong 6-figure tax-free income stream to supplement their lifestyle in their retirement (as well as a tax-free legacy benefit for life).