How to build better communication with business owners

Your communication with business owners will increase when you use concise, clear language to explain planning concepts. Here is a list of the essential terms for communicating effective strategies and techniques.

Terms from A-E

Annual Gift Tax Exclusion – An annual monetary amount ($15,000 in 2020) that each person may give away without gift tax consequences. This amount can be doubled for married couples. The exclusion amount is also indexed for inflation.

Applicable Exclusion Amount – The amount of assets that can pass to a non-spouse after death, free of federal estate tax. In 2020, the amount is $11.58 million per individual. Married couples can get the benefit of two individual exemptions totaling more than $23 million in 2020.

Business Valuation – A process for estimating the fair market value of a company using established principles. Professional appraisers are skilled in business valuation techniques, which often use multiple analytical methods to create an estimate of the price a willing buyer would pay for the business in an arm’s-length transaction.

Buy-Sell Agreement – An arrangement through which two or more owners of a business determine the conditions and price at which they will sell shares to each other. The agreement may establish events that trigger a share exchange, such as death, disability, or retirement. It may also specify a formula for valuing each owner’s shares, and identify source(s) of buy-out funding.

C Corporation – A structure for organizing a company as a legal entity with continuous life, separate from any individual owner or shareholder, under state law. Under U.S. federal income tax law, the income of a C corporation is taxed at corporate rates, separately from the returns filed by company owners. Directors and managers of a C corporation normally have limited liability for the debts and obligations of the company.

Cash Surrender Value – The amount an insurance company will distribute to a policyholder who surrenders a permanent life insurance policy with cash value. Usually it is the policy’s cash value less any surrender charges.

Closely Held Business – A privately held company with a limited number of shareholders. The company’s stock is not offered to the public, and shares may have limited liquidity.

– Collateral Assignment (Loan Regime) Split Dollar A type of split dollar program in which the key employee owns a life insurance policy on his or her life and has an interest in the cash value.  Premium payments made by the employer are treated as loans.  The employer normally charges interest on these premium payments based on the IRS 7872 rate.

Cross Purchase Agreement – An agreement between owners or partners of a business under which they agree to purchase each other’s shares upon designated trigger events such as death, disability, or retirement. The obligations established in these agreements often are funded with life insurance.

Economic Benefit Regime (Split Dollar) – A type of split dollar program in which the company advances part or all of the annual premiums required to fund a permanent life insurance policy for a key executive. The employer owns the policy and its cash values.  Split-dollar arrangements are implemented for key employees or executives as supplemental compensation.

Estate Planning – A process designed to evaluate and mitigate the impact of federal estate and other transfer taxes, while also helping to distribute assets efficiently at death without the public disclosures and delays of probate.

Executive Bonus Plan (Section 162) – A type of non-qualified executive benefit in which an annual bonus is used to purchase permanent life insurance owned and controlled by the executive. In a “double bonus” plan, the employer also bonuses enough money to pay the annual income tax due on the bonus.

Terms from F-M

Fully Insured Pension Plan – A type of defined benefit retirement plan in which all promised benefits to participants are funded with insurance company products, including life insurance and annuities. Participants look to the insurance company and its financial strength to meet the plan’s promises, and the plan is not required to participate in the Pension Benefit Guaranty Corp (PBGC).

General Partnership – A type of partnership in which one or more general partners assume responsibility for managing a business, with each general partner fully liable for business debts and obligations. It is distinct from a limited partnership, which has passive investors (limited partners) who do not engage in management and have limited liability for business debts and obligations.

Generation Skipping Transfer (GST) Tax – A component of the federal transfer tax system designed to tax bequests and transfers that otherwise might escape federal gift or estate taxes because they skip a generation. The bypassed generation is called a “skip generation.”

Golden Handcuffs – A type of employee benefit program that acts to bind an executive or employee to a company. The program usually has incentives that can only be fully realized by staying employed with a business for several years or until a target date such as retirement.

Installment Sale – The sale of a business or business/personal assets for consideration received in installments, over time. The buyer is required to make regular payments of principal and interest to the seller. In some cases, the seller does not recognize capital gains until amounts are received.

Irrevocable Life Insurance Trust (ILIT) – A trust designed to hold one or more life insurance policies. Usually the grantor is the person insured by the policies and pays the premiums, but in an ILIT, the grantor gives up ownership and control of the policies to the trustee for favorable estate tax treatment.

Key Person Insurance – Life or disability income insurance designed to protect a business against economic loss caused by the death or disability of an owner or key executive. Usually the business owns the policy, pays premiums, and is the beneficiary. The coverage can help to pay for finding, recruiting, or compensating a replacement as well as any business loss or interruption.

Legacy Planning – A process for addressing personal and business goals for making an impact or doing good works after death. For business owners, legacy planning can encompass continuity of the business or family ownership. For individuals, it can include gifts and bequests to charity, establishing trusts to support one or more generations of heirs, or creating a family foundation to distribute wealth to worthwhile causes.

Lifetime Gift Tax Exemption – An amount of money ($11.58 million in 2020) that each person may give away in his/her lifetime without paying a federal gift tax. Each person is entitled to both annual gift tax exclusion (per recipient) and the lifetime gift tax exemption. Utilizing both together can be an effective way to make lifetime asset transfers for estate tax minimization.

Limited Liability Company (LLC) – A form of business organization allowed under state law. Although an LLC is not considered to be incorporated, its owners and managers enjoy the same limited liability of a corporation. Unlike a C Corporation, an LLC does not pay corporate income tax but rather passes its income and/or losses to its owners, who are called “members.” An LLC is governed by an operating agreement among members.

Living (Inter-Vivos) Trust – A type of trust in which the grantor retains ownership and control of any trust assets during his/her lifetime and has the power to revoke the trust or change its terms. It is also called a revocable living trust.

Terms from N-R

Non-Qualified Deferred Compensation (NQDC) – Compensation that a company’s key executives agree to defer until a future date, under a formal agreement. The company promises to pay the compensation and interest or earnings on the amounts deferred when the executive dies, becomes disabled, retires, or reaches a trigger event specified by agreement.

One-Way Buy-Sell Agreement – A buy-sell agreement to transfer shares of a closely held business at designated trigger events, with only one party obligated to transfer. In a conventional buy-sell, two or more parties are mutually obligated. The one-way buy-sell often is used to address imbalances in wealth between owners.

Partnership – A business form in which two or more entities agree to pool their efforts, capital, and resources to build and run an unincorporated business. Under U.S. tax law, the gains or losses of partnerships flow through to each partner and are reported by them separately. The partnership itself is not a taxable entity. Under laws of many states, partnerships must dissolve or be reorganized upon the death of a general partner.

Qualified Terminable Interest Trust (Q-TIP) – A type of trust in which a surviving spouse receives trust income annually for life and then the trust remainder passes to other beneficiaries, such as children. The grantor retains control over how the remainder is distributed through the trust’s terms. One goal of a Q-TIP is to minimize federal estate tax on a couple’s assets.

Terms from S-Z

S Corporation – A form of business organization authorized under federal law for domestic companies with 100 or fewer shareholders. S corporations enjoy some benefits of incorporation, such as limited liability, but they are taxed the same as partnerships. All shareholders must be individuals, and all shareholders must agree to the S Corporation election.

Section 1035 Exchange – A like-kind exchange of one life insurance policy for another, or one annuity contract for another, so that little or no income tax is owed on the surrender/transfer of cash value from the first policy or contract to the other.

Section 302/303 – Sections of the Internal Revenue Code that allow corporations to make a distribution to shareholders for purposes of redeeming a deceased owner’s stock, without the distribution being treated as a dividend. These distributions can be useful for paying estate taxes and expenses.

Sole Proprietorship – A form of business organization in which all business income and expense is reported on the tax return of a single owner, or a jointly filing husband and wife who both work in the business. Sole proprietorships cease to exist on the death of the owner.

Succession Planning – A planning discipline that focuses on helping business owners continue operation and management after they have retired, died, or become disabled. The planning also may develop strategies for helping owners convert their business equity into cash.

Supplemental Executive Retirement Plan (SERP) – A type of non-qualified executive benefit exclusively funded by the employer. The benefit often promises to pay a lump-sum benefit on retirement or death, or else a retirement income. Unlike a qualified retirement plan (which must cover all eligible participants), an SERP may be used selectively to reward or incentivize selected key executives.

Umbrella Liability Insurance – Excess liability coverage that begins at standard limits and extends well beyond. The goal is to help individuals and businesses protect against large liability claims. For example, a standard liability policy may only cover the first $100,000 of claims in a “slip-and-fall” accident. Umbrella coverage then could cover any additional claims up to $1 million.

Unlimited Marital Deduction – A provision in federal estate tax law that allows a married person to leave unlimited assets to a U.S. citizen spouse, without federal estate and gift tax liabilities.

Wait-and-See Buy-Sell – A buy-sell agreement in which specific terms may not be set until a trigger event, such as the death or disability of an owner or partner. For example, the agreement might offer owners the choice of using either a cross-purchase buy-sell structure or an entity purchase structure.

Life insurance products are issued by Equitable Life Insurance Company (NY, NY) or Equitable Financial Life Insurance Company of America (Equitable America), an Arizona stock company with an administrative office located in Charlotte, NC, and are co-distributed by affiliates Equitable Network, LLC (Equitable Network Insurance Agency of California in CA; Equitable Network Insurance Agency of Utah in UT; Equitable Network of Puerto Rico, Inc. in PR), and Equitable Distributors, LLC. Variable products are co-distributed by Equitable Advisors, LLC (Member FINRA, SIPC) (Equitable Financial Advisors in MI and TN) and Equitable Distributors, LLC. When sold by New York based (i.e. domiciled) Equitable Advisors Financial Professionals life insurance is issued by Equitable Financial Life Insurance Company (NY, NY).

For financial professional use only/Not for distribution to the public.

IU-3266003 (10/2020) (Exp. 10/2024)