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MANAGEMENT TEAM BUY-OUT & INCENTIVE PLAN
HYPOTHETICAL CASE STUDY

 

Background
• Hypothetical Company, Inc., S-Corp established 25 years ago.
• Company founder 58, intent that his company continue and prosper in the event of his death or retirement, in the hands of four key-managers.
• Full enterprise value, $100 million.
• Voting shares discounted value $42 million
• Controlling interest of voting shares, $21 million.
• Existing term Life insurance on company founder, $14 million

 

Key Objectives
• Create an incentive plan for key-executives to take over and run company in event of founder’s death or retirement. Relieve surviving spouse of burden of running the company
• Buy-sell agreement to establish price and facilitate transfer of shares from surviving spouse to key managers. Make provision for lifetime sale of shares. Fund one-way buy-sell agreement with $14 million permanent life insurance, leaving $7 million note payable to surviving spouse.
• Minimize depletion of $22 million existing lifetime estate tax exemption.
• Death benefits received tax-free by key-executives (no trigger of Transfer-for-Value Rule)
• Death benefits not includable in taxable estate (founder to have no Incidents-of- Ownership in Life Insurance).
Result
• Formed Management Team Buy-out LLC with managers as equal members, founder 1%, taxed as “Partnership”
• Corporate funded split-dollar agreement between corporation and LLC. Buy-Sell agreement between Key executives and founder’s spouse establishes at-death purchase price. Also includes provision for lifetime purchase of founder’s shares.
• Removal of insurance proceeds from founder’s taxable estate
• Non-Qualified Deferred Compensation (“NQDC”) plan informally funded with Life Insurance, with performance targets creates management team incentive
• Low-cost incentive and business continuity plan for smooth transition of management in the event of the founder’s death, with provision for lifetime buy-out. Life insurance premiums and cash values remain an asset of the corporation through the split-dollar agreement.
• Avoided multi-million-dollar structural costs of alternative plans that included Phantom Stock, Non-Qualified stock options and Executive bonus arrangements.

 

This hypothetical case study is based on our general understanding of the subject matter and is for informational purposes only. It should not be considered tax or legal advice. Accordingly, any tax information provided is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from your own tax and legal advisors.


Life Insurance policy loans and withdrawals will generally reduce the face amount and cash value of a contract. As insured ages higher premiums may be needed in later years to keep the policy from lapsing.


Equitable Advisors is the brand name for AXA Advisors, LLC. Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Investment advisory products and services offered through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC. AXA Network conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of UT, LLC, in PR as AXA Network of Puerto Rico, Inc. AXA Advisors, its affiliates and financial professionals do not provide tax or legal advice. Paramount Advisors Group is not a registered investment advisor and is not owned or operated by AXA Advisors or AXA Network. PPG-151130 (2/20) (Exp. 2/22) Page 1 of 2

 

 

 

 

 

 

 

 

Equitable Advisors is the brand name of AXA Advisors, LLC (Member FINRA, SIPC)

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Securities offered through AXA Advisors, LLC (212-314-4600), member FINRA/SIPC. Investment advisory products and services offered through AXA Advisors, LLC, an investment advisor registered with the SEC. Annuity and insurance products offered through AXA Network, LLC and its insurance agency subsidiaries. AXA Network, LLC does business in California as AXA Network Insurance Agency of California, LLC and, in Utah, AXA Network Insurance Agency of Utah, LLC. AXA Advisors and its affiliates do not provide tax or legal advice. Individuals may transact business and/or respond to inquiries only in state(s) in which they are properly registered and/or licensed. The information in this web site is not investment or securities advice and does not constitute an offer.

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