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Stay bonus strategy

Preserving business value after an owner’s death

When a business owner dies, key employees may be concerned about the future and think about leaving the business. A stay bonus strategy can help retain key employees by providing a financial incentive to stay.

Why choose a stay bonus strategy?

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Target client

Businesses with the following characteristics:

  • Small business with one owner or a majority owner
  • Key people are responsible for the strength and growth of the company
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The benefits

  • Protects the owner’s family by helping uphold the business’s value
  • Stabilizes the business at the owner’s death by retaining key employees and reassuring creditors, vendors and customers
  • Provides flexibility — depending on ownership, the policy can be used for a combination of other business owner objectives (see table below)
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Considerations

  • Since no ownership is transferred, the family and/or others continues to own the business
  • Employees must pay income taxes on the stay bonus, and the business receives a deduction

BOLD sales support

Contact the Securian Financial Advanced Sales Team today.

1-888-413-7860, option 3

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How it works

1. The business purchases a life insurance policy on the business owner’s life. The purpose of the policy is to provide liquidity to potentially pay bonuses to select key employees after death of the owner.

Stay bonus buy sell lg
Owner Why? Considerations Other objectives
Business owner Business owner can access the policy Must be included in the owner’s estate Supplemental income, income
replacement, legacy strategies
Business Business pays policy premiums Cash value and death benefit is paid to the business and tax issues may arise when taking these funds out of the business Key person, entity redemption buy-sell
Irrevocable life insurance trust Keeps the policy out of the business owner’s estate and outside the reach of business creditors

Prevents the business owner from accessing the policy

Estate tax planning, legacy
strategies

2. If the business owner dies, a bonus agreement is executed to retain the key employees by providing a financial incentive to stay with the business.

3. The life insurance policy’s death benefit proceeds provide the funds needed for the stay bonus.

Stay bonus buy sell agreement sm
One way buy sell policy bonus sm

Take BOLD action

Key resources

We’ve assembled tools you may need to present to a client in one convenient stop.

Business succession tools and resources—tools and topics

Learn how to use BOLD with clients

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View the step-by-step process

Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any way where it would be accessible to the general public.

DOFU 10-2022

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