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Presented By: Robert B. Wellendorf II, CLU®,AEP®, CAP®
EXECSO, Inc.Business Exit Planning
Omaha, NE
Using Life Insurance in the Business MarketplaceAugust 11, 2020
NAIFA NEBRASKA FORUM2020
BUSINESS | FAMILY | WEALTH | LEGACY | PHILANTHROPY
Key Learning Points
▪ Discovery, discovery, discovery
▪ Understanding life insurance as a tool to solve the ‘why’
▪ Importance of collaboration in the business succession planning marketplace
The Closely-held Business Landscape…
Despite 95% of the business owners affirming that “transition strategy is important”…
➢ 62% had given ‘limited’ to ‘no attention’ to their exit plans
➢ 71% had no written company transition plan and 43% had done “no planning at all”
➢ 81% had not established a formal transition team
➢ 72% had not accomplished any formal transition education
*EXIT PLANNING INSTITUTE (EPI) STATE OF OWNER READINESS REPORT,
2019 NEBRASKA
• Jill 63 & Joe 66 (Married) Owner/Operators
• ABC, Inc. - S-Corp, Ownership 90% - Jill and 10% Joe
• XYZ Investments LLC – real estate, multiple business and non-business properties
• Captive Insurance Company approximate value of $2 million; reserved capital invested in mutual funds
• Total net worth over $15 million
• 2 sons, 2 daughters and 8 grandchildren
• Owners would like to exit business within 2 years with no carry back note if possible
• Looking for exit planning guidance; open to possibilities of internal or external sale
• Oldest son interested in ownership and operations; not involved with the business currently and never has been
• Youngest son may want ownership and has very recently returned to be active again in the business
Case Example – Facts…
• High customer concentration risk with one company. This customer inquired about a succession plan
• $3+ million invested with financial advisor, qualified and non-qualified
• Have started 529 plan funding for grandchildren
• 2 individual life policies and a second-to-die policy currently in force
• Would like to treat family fairly and would like active son to earn or buy ownership
• Current estate plan shows children in equal shares. Unfunded irrevocable trust. Legacy goals
• Charitable intentions and family harmony; very important
• Have experienced advisors; CPA, life insurance professional, estate and business attorneys, investment advisor
• These advisors have never met each other
Client Objectives of Engagement
➢Maintain lifestyle / current income to continue to age 95➢Design and implement a successful business exit
strategy➢Provide legacy to children and grandchildren➢Maintain family harmony➢Make a “more significant impact” for charity(ies)
Objective: Maintain Lifestyle
Income Sources Identified:
401k Jill401k JoeIRA Brokerage Account JillIRA Brokerage Account JoeIRA Annuity JillIRA Annuity JoeLife Policy JillLife Policy JoeSurvivorship Life Policy – personally owned
Business Assets:Proceeds from the sale of ABC, Inc. – Deal Structure TBDCaptive Insurance Co more than likely will unwindXYZ, LLC – Owns the building and equipment used by ABC, Inc
Ongoing Income (& Legacy) Design
XYZ Inc. Rental
Captive Insur
Objective: Maintain Lifestyle
Life Insurance – ‘The Why’
Utilization of Existing Life Insurance PolicySecond-to-Die Universal Life
Life Insurance Design:Insured – Jill and Joe, Joint LifeOwner – Personally-ownedBeneficiary – Revocable Trust / Trust Beneficiaries are Four Children Equally Death Benefit - $3,100,000 Contract / Current DB in excess of $4.5 MMType – Survivorship Universal LifePayor – Jill and Joe – Annual funding has been up to as much as $152,500 based on owners’ cash flow (policy is currently in year 13)Use – provide annual income at retirement
Ongoing Income Design
XYZ Inc. Rental
Captive Insur
And Legacy
PARTICIPATION VERIFICATION QUESTION:
What percentage of Nebraska business owners surveyed
have a written succession plan?
A) 10%
B) 30%
C) 50%
D) 90%
Objective: Business Exit Strategy
Buyers Identified/Internal Sale:Key Employee – General Manager – Mike, Age 38Key Employee (son) – Project Manager – Jack, Age 34
Deal Structure Determined:Sale Price = $3,605,000Excludes Captive Insurance Company and ABC, Inc (building and equipment)Initial Payment Due at Closing = $350,000Balance of $3,255,000 payable over 3 years at 4.25% interestOwners carrying back entire note
Objective: Business Exit StrategyLife Insurance – ‘The Why?’
Placement:Key Employee – General Manager – Mike, Age 38Key Employee (son) – Project Manager – Jack, Age 34
Life Insurance Design:Insured – MikeOwner – JillBeneficiary – Joe and JillAmount of Death Benefit - $2,000,000Type – 10 Year Term with Conversion*Payor – Joe and Jill / approx $3000 Annual
* The premiums paid could be part of the deal structure.
Looking ahead – policy could be sold to new owners, and they could convert them to permanent insurance and use for supplemental retirement income, OR to fund their buy/sell.
Insured – JackOwner – JoeBeneficiary – Joe and JillAmount of Death Benefit - $2,000,000Type – 10 Year Term with Conversion*Payor – Joe and Jill / approx $3000 Annual
Objective: Legacy and Charitable Planning
Life Insurance – ‘The Why’
Placement:$5,000,000 Second-to-Die
Life Insurance Design:Insured – Jill and Joe, Joint LifeOwner – Irrevocable TrustBeneficiary – 50% to Four Children in Separate Trusts / 50% Donor Advised Fund Death Benefit - $5,000,000Type – Survivorship Indexed UL*Payor – Irrevocable Trust through Annual Gifting and/or Promissory Note
* Premiums could be financed based on client net worth and financial position
Leveraged Planning Solutions - Illustrated
Year 25, Ages 91 & 88Out of pocket is approximately $1 Million Leveraged to $4.1 Million
Policy Year
Annual
Premium Annual Loan
Out of Pocket
Premium
Death Benefit
Net of Policy
Loans Loan Balance
Annual Loan
Interest
Policy
W ithdrawls or
Loans
Out of Pocket
Interest
Surrender
Value Net of
Policy Loans
Surrender
Value Net of
Collateral &
Policy
Assignments
Death Benefit
Net of Policy
Loans &
Assignments
1 $321,691 $321,691 $0 $5,000,000 $321,691 $25,193 $0 $25,193 $117,897 -$203,794 $4,678,310
2 $321,691 $321,691 $0 $5,000,000 $643,381 $35,386 $0 $60,579 $398,875 -$244,506 $4,356,619
3 $321,691 $321,691 $0 $5,000,000 $965,072 $53,079 $0 $113,658 $698,469 -$266,603 $4,034,929
4 $321,691 $321,691 $0 $5,000,000 $1,286,762 $70,772 $0 $184,430 $1,017,926 -$268,836 $3,713,238
5 $321,691 $321,691 $0 $5,000,000 $1,608,453 $88,465 $0 $272,895 $1,358,616 -$249,837 $3,391,548
6 $321,691 $321,691 $0 $5,000,000 $1,930,143 $106,158 $0 $379,053 $1,754,768 -$175,376 $3,069,857
7 $321,691 $321,691 $0 $5,000,000 $2,251,834 $123,851 $0 $502,904 $2,175,317 -$76,517 $2,748,167
8 $321,691 $321,691 $0 $5,670,786 $2,573,524 $141,544 $0 $644,448 $2,621,122 $47,598 $3,097,262
9 $0 $0 $0 $5,804,183 $2,573,524 $141,544 $0 $785,992 $2,789,769 $216,245 $3,230,659
10 $0 $0 $0 $5,945,862 $2,573,524 $141,544 $0 $927,536 $2,986,831 $413,307 $3,372,338
$2,573,524 $2,573,524 $0 $927,535 $0 $927,535
11 $0 $0 $0 $3,416,142 $0 $2,573,524 $923,486 $923,486 $3,416,142
12 $0 $0 $0 $3,461,797 $0 $0 $1,010,757 $1,010,757 $3,461,797
13 $0 $0 $0 $3,509,095 $0 $0 $1,102,208 $1,102,208 $3,509,095
14 $0 $0 $0 $3,557,708 $0 $0 $1,197,433 $1,197,433 $3,557,708
15 $0 $0 $0 $3,607,330 $0 $0 $1,295,873 $1,295,873 $3,607,330
16 $0 $0 $0 $3,657,420 $0 $0 $1,397,022 $1,397,022 $3,657,420
17 $0 $0 $0 $3,707,346 $0 $0 $1,500,302 $1,500,302 $3,707,346
18 $0 $0 $0 $3,756,843 $0 $0 $1,605,184 $1,605,184 $3,756,843
19 $0 $0 $0 $3,808,077 $0 $0 $1,711,719 $1,711,719 $3,808,077
20 $0 $0 $0 $3,861,091 $0 $0 $1,819,156 $1,819,156 $3,861,091
25 $0 $0 $0 $4,136,636 $0 $0 $0 $0 $2,360,130 $2,360,130 $4,136,636
PARTICIPATION VERIFICATION QUESTION:
In our case study, how many children do Jill and Joe
business owner have:
A) 1
B) 2
C) 4
D) 8
Objective: Family Harmony
Resources:In-force Second-to-Die; DB approximately $4MM (currently used for income)New Second-to-Die; DB approximately $5 MMAnnual Charitable Giving (historically around $85,000 per year – information from 1040 Schedule A)
Design:Established a Donor Advised Fund (DAF) at the local community foundationNamed as 50% beneficiary on new second-to-die life policyFunded initially with $50,000 cash
Use:Facilitated family meetings regarding charitable giving; 2x per year
Client Objectives of Engagement:
❑ Maintain lifestyle / current income to continue to age 95
❑ Design a successful business exit strategy
❑ Provide legacy to children and grandchildren
❑ Maintain family harmony
❑ Make more significant impact for charity(ies)
Attorney
CPA
Commercial
Banker
Investment
Advisor
Commercial
Insurance
Broker
Life Insurance
Professional
Financial
Planner
Employee
Benefits
Provider
Business
Owner &
Family
"We keep families together by helping
effectuate your wishes and desires now, which eliminates them from
being subject to interpretation later.”
Presented By: Robert B. Wellendorf II, CLU®, AEP®, CAP®
9802 Nicholas St., Suite 375, Omaha, NE 68114
402-991-1700
EXECSO.com
BUSINESS | FAMILY | WEALTH | LEGACY | PHILANTHROPY
Q & A
BUSINESS EXIT PLANNING
Depending on Time –
May have this ‘call to action’…
Business Succession Planning and ‘Getting it Right’
What IS at stake?
What is at stake?
Owner
What is at stake?
Owner
CFO VP Sales
Owner
COO
Owner
COO VP
Assistant
Manager Manager
Assistant
Manager Manager Manager
Add in some management…
Owner
COO VP
Assistant
Manager Manager
Assistant
Manager Manager Manager
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Assistant
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Assistant
Staff
Staff
Staff
Staff
Staff
Staff
Staff
And Staff…
OWNER
CFO
Manager Manager
Staff
Staff
Staff
COO
Manager Manager Manager
Assistant
Assistant
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Staff
Assistant
Assistant Assistant
Owner’s Spouse
Child 2
Child 2
Child 2
Grandchild
Grandchild
Grandchild
Grandchild
Grandchild
And Families…Owner
Owner’s Family
About 118 if you
are counting