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Retirement income and protection strategies

Owner retirement income and protection strategies

A business owner may want to incorporate a personal retirement arrangement into the business succession strategy. This may involve personal financial strategies or a formal qualified plan with the business.

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Installment note — income strategy

Installment note income strategy lg

Because a new owner likely will not be able to pay the entire purchase price, the business will probably be purchased on an installment basis.

  • An installment purchase allocates the financial strain for the new business owner to the back end of the transition.
  • Even if the new owner gets a loan from a bank, it will likely cover only a portion of the purchase price.
  • Life insurance should be considered for liquidity in the event of the buyer’s death.

Consulting agreement — income strategy

Consulting agreement income strategy lg

The selling business owner might also want to consider a consulting agreement after the new owner takes over. This agreement:

  • Allows the selling owner to receive additional compensation.
  • Provides compensation that would be taxed as income to the former owner, and tax deductible to the new owner.
  • Allows the former owner to track the new owner’s progress and help transition goodwill and relationships to the new owner.

Maintaining business value through non-owner executive compensation

This approach helps business owners maximize the value of their business by helping ensure key employees are satisfied both monetarily and professionally.

Learn more about executive compensation strategies

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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 form where it is accessible to the general public.

DOFU 10-2022