Executives often have complex financial situations due to their higher income levels, stock options, bonuses, and other top-tier compensation packages. As a result, their financial planning requires specialized attention to maximize their wealth, protect assets, and achieve their long-term financial objectives. The strategists at Leonard Financial Solutions provide insight and guidance on important plan features that help enhance growth and retain top talent.
Executive Financial Plans for Business Owners Nationwide
An executive financial plan is typically developed in collaboration with a team of financial advisors, including certified financial planners, tax professionals, estate planning attorneys, and investment advisors who specialize in working with individuals at a certain net worth level. Each individual’s plan should be periodically reviewed and adjusted as circumstances change or new company goals are established. Here are some of the primary components to consider.
Buy-Sell Agreement
A Buy-Sell agreement plans for the ownership transition after death or long-term disability. Many small businesses have more than one owner. These co-owners need to establish how to handle the ownership transition and keep the business going after one of them dies or suffers a long-term disability.
Without a prearranged plan determining how to value ownership shares and finance the sales of the shares, the surviving or healthy co-owner(s) may find it difficult to acquire the ownership stake of the deceased or disabled co-owner. Most companies don’t survive the loss of a co-owner when an advance plan doesn’t exist. Detailed life insurance plans for businesses can provide the funds to redeem ownership shares, and disability income coverage may extend benefits to a disabled co-owner and help pay the overhead costs of the business.
Key Person Insurance
Every successful business has at least one key employee or contributor who’s indispensable. These individuals—whether they’re the owner or co-owner of the business or members of the entire C-suite—are so valuable to the business that their disability or death threatens the survival of the firm. A key person insurance policy indemnifies the firm against such a loss, providing liquidity to sustain cash flow, keep accounts current, and cover the expenses of seeking and training a suitable replacement.
Employer-Sponsored Retirement Plans
An important baseline employee benefit is a retirement plan. These plans take many forms depending on the type and size of the sponsoring organization, typically either a for-profit business, a non-profit organization, or a governmental entity. Unfortunately, especially during a recessionary economy, some employers have curtailed contributions to their retirement plans. Nevertheless, employees have come to expect these programs—so much so that the lack of a retirement plan may pose two strikes against a company in the competition for attracting and keeping talented employees and key executives.
Split Dollar Insurance
This type of policy provides business owners with flexibility for funding executive benefits. Rather than the business paying all premiums, this expense can be split between the company and the employee. The ultimate death benefit payout (or policy rollout at the employee’s retirement) can be split as well to enable the company to recover its costs—hence the name split dollar.
Either the company or the employee can own the policy, with the two arrangements known as endorsement and collateral assignment, respectively. Because of the variety of possible arrangements, a written agreement normally governs the use of this technique by an employer (another difference from an executive bonus).
Executive Bonus
This is a popular technique for attracting and rewarding key employees, largely because of its relative simplicity. An employer establishes a life insurance policy on a key employee as a fringe benefit and pays the premiums in the form of a bonus to the employee. The bonus is a tax-deductible expense for the business (so long as the bonus doesn’t exceed reasonable compensation guidelines under federal tax law) and is tax-reportable income for the key employee. The executive usually holds all rights in the policy, which can make this a valuable personal asset.
Business owners can install bonus plans for themselves and be selective in using this type of benefit—there are no federal non-discrimination regulations to worry about, as there are for qualified plans. The main requirement for providing an executive bonus plan is sufficient, consistent cash flow to pay the bonuses for the policy premiums.
Supplemental Executive Retirement Plan (SERP)
A powerful incentive for retaining executives, the SERP is one of the most common examples of a non-qualified benefit plan. As the name indicates, it’s meant to supplement the regular retirement benefits of a key executive, such as income from assets accumulated in a 401(k) or other qualified plan. The supplemental benefits are specified in a contract or agreement so that the key executive has the incentive to stay with the firm until retirement, when the benefit payout begins.
These plans have relatively few federal compliance requirements but must be structured carefully for their taxation impact on both the employer and employee. Companies usually purchase life insurance as an informal SERP funding vehicle because of its long-term tax advantages. In a typical SERP, an employer is the owner, premium payor, and beneficiary of the life insurance policy.