A Strategy Spotlight
for Businesses
Funding a One-Way
Buy-Sell with a Leveraged
Bonus Arrangement
Many business owners overlook a few questions
that truly need to be addressed sooner rather
than later. What will happen at death or at your
retirement if you have no obvious heirs to take over
the business? What if your spouse is not in the
business and is unable to run it?
As troubling as these questions are, even more unsettling is
questioning: “Will there be a willing buyer to purchase my business
at my death or retirement, and will my heirs get the full value of my
business?” One of the worst times to sell a business is at your death
or retirement when there might not be a willing buyer or when there
is no one able to take over the business you built.
How Will You Provide for Your Spouse?
As a business owner what is most important to you is the continuity
of the business and the certainty that there will be a guaranteed
market for your interest at a fair market value. One possible
solution for a business owner is to consider a new business planning
strategy, the Leveraged Bonus/One-Way Buy-Sell arrangement with
a key employee.
The information provided is not written or intended as specific tax or legal advice. MassMutual, its
employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged
to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process
should work with an estate planning team, including their own personal legal or tax counsel.
NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION • NOT FDIC OR NCUA INSURED • NOT INSURED BY
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Business Planning Strategies
A One-Way Buy-Sell Agreement is Between a Key
Employee and an Owner (Partner or Stockholder).
The agreement provides for the planned disposition of the business
owner’s interest to the key employee in the event of the death or retirement
of the owner(s). The key employee is the policyowner and beneficiary of
a whole life insurance policy on the business owner’s life (the insured).
The business pays an executive bonus to the employee in the amount of the
policy’s premium. The bonus is generally a tax-deductible expense to the
employer and taxable to the key employee. As such, the key employee is
responsible for any taxes due on the bonus. He or she then pays the annual
premium due on the policy to the insurance company from the proceeds
received via the bonus.
At the death of the owner, the key employee would use the policy proceeds
to buy the business interest from the decedent business owner’s estate. More
typically, an owner will announce his/her decision to retire at which time
the key employee would then purchase the business with a combination of
policy cash values and a personal promissory note.
Some business owners may insist on tying the bonus to some type
of security or golden handcuff provisions. This can be partially
accomplished through the use of a Leveraged Bonus arrangement. In
this strategy, the standard bonus is accompanied by a business loan to the
key employee in an amount equal to the cost of the taxes due on the key
employee’s annual bonus. The key employee in turn will pay the employer
the interest accrued on the outstanding loan. The loan is secured by an
assignment of the policy. In this way, the business effectively controls access
to the policy cash values while the loan is outstanding.
As part of the leveraged arrangement, the employer may allow the loan and
interest to accrue, and repayment may not be required until the loan is called.
A dividend-paying whole life insurance policy can be an appropriate vehicle
to help with the repayment of all the amounts due to the employer.
How it Works
Deductible
Bonus
IRS
Buy-Sell agreement
settled via policy values
Employer loan
Business Owner
Loan (plus interest) repaid
by cash value or death benefit
Taxes
(paid with employer loan)
Employee/Policyowner
Premiums (paid with bonus)
Policy is collateral for loan
MassMutual Policy
In conclusion, a Leveraged Bonus/One-Way Buy-Sell combination with a
key employee arrangement can provide the following:
• A vested interest in the business and its continued prosperity for the
key employee;
• A high level of employer control with little administration due to the
limited number of parties involved;
• A fair price for the business interest of the owner’s estate;
Death Benefit
Beneficiaries
• Assurance that the key
employee is not overly
burdened with what may
be substantial life insurance premiums;
• A tax-deductible expense of life insurance premiums that benefits
the company; and
• A source for purchase of the business.
Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost
basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax
penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy
will lapse, and may result in a tax liability if the policy terminates before the death of the insured. Loan interest is charged when a policy loan is taken. If you
take additional policy loans to pay loan interest, your policy’s cash/account value will be reduced. At some point, no policy values may be available to pay
additional loan interest and out-of-pocket payments will be required to prevent the policy from lapsing. Failure to pay out-of-pocket amounts will result in
the loss of life insurance coverage and a tax liability in the year of lapse.
MassMutual. We’ll help you get there.®
There are many reasons to choose a life insurance company to help meet
your financial needs: protection for your family or business, products to
provide supplemental income and the confidence of knowing you will be
prepared for the future.
At Massachusetts Mutual Life Insurance Company (MassMutual), we
operate for the benefit of our participating policyowners. We stand strong
in the fundamental belief that every secure future begins with a good
decision. And when choosing a life insurance company – ownership,
strength and stability matter.
Learn more at www.massmutual.com/mutuality
© 2016 Massachusetts Mutual Life Insurance Company, Springfield, MA 01111-0001. All rights reserved. www.massmutual.com.
MassMutual Financial Group is a marketing name for Massachusetts Mutual Life Insurance Company (MassMutual) and its affiliated companies and sales representatives.
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