David Watson

Monday, 23 May 2005 09:12


As important as we all know it is, saving for retirement isn't always easy. For most people, there are bills to pay, children to educate and businesses to manage -- expensive undertakings that often relegate saving for retirement to the back burner.

Unfortunately, by the time many people are finally in a position to start putting substantial amounts of money aside for retirement, federal tax law limits the amounts they are able to defer into 401(k) and other retirement savings plans.

If you are a small business owner, professional, independent contractor or are in your peak earning years, you may be experiencing the frustration of finally having the money but essentially being unable to save for the kind of retirement you want.

A large chunk of your income must be paid in taxes, and many tax-qualified retirement plans have an annual cap on the contributions they allow you to make. Or they are so complex that they require you to have an enrolled actuary under contract to make sure you are in compliance with IRS regulations.

As a result, you are not saving enough, right now while you can, to achieve your retirement goals. And that has to be a cause for worry.

There is a solution, called a 412(i) Defined Benefit Plan.

Section 412 of the Internal Revenue Code contains complex funding rules that apply to all defined benefit plans, except those that fall under subsection 412(i). Those plans are funded solely by individual life insurance and annuity contracts (or only annuity contracts), and the amount you pay into the plan each year is the amount of contribution that will guarantee the plan benefits.

As a result, your annual premium, or plan contribution, can be much more than the $41,000 cap imposed by traditional retirement plans.

Here are some of the benefits offered by 412(i) plans.

* You can set aside substantial amounts of money, sometimes upwards of $150,000 or more each year.

* All your contributions to the plan are completely tax-deductible.

* All plan benefits are completely guaranteed.*

* Your earnings will accumulate in the plan on a tax-deferred basis.

* Plan assets may be protected from lawsuits, creditors and other risks.

Because of its unique design, you can't overfund or underfund a 412(i) plan. And because the plan is IRS-approved, you won't need an enrolled actuary's certification each year, potentially lowering plan administration costs.

There is, however, a basic requirement -- 412(i) plans must be funded exclusively through insurance and/or annuity contracts in order for all benefits to be guaranteed, and 412(i) plans work best for high-net-worth individuals, businesses that are established and highly profitable businesses with fewer than five employees, and businesses with owners who are at least 50 years old, within 10 years of retirement and older than the firm's other employees.

If you're one of the growing number of people who, for whatever reason, need to start saving a large amount of money for retirement in as short a time as possible; if you're a business owner looking for a unique way to reward yourself and your employees; and if you're looking for substantial relief from income taxes, you owe it to yourself to find out more about 412(i).

W. Morgan Watson, CFS, is managing director of National Financial Services Group. He specializes in wealth management, retirement and business planning. Reach him through the company's Web site, www.nationalfinancialservicesgroup.com.

Securities and Investment advisory services are offered solely be Equity Services Inc., a registered broker/dealer and investment advisor, 1050 Crown Pointe Parkway, Suite 1000, Atlanta, GA 30338. National Financial Service Group is independent of Equity Services Inc.

*Guarantees are made available through the use of annuity and life insurance contracts and are dependent upon the claims-paying ability of the issuing company.

Thursday, 18 November 2004 19:00

Planning for family business succession

Most assets in one's estate, such as investments or real estate, have such intrinsic value that the death of the owner has no effect on them. In contrast, ownership of a closely held business requires special planning if the value of the business is to be protected after the death or disability of the owner.

The term "succession planning" encompasses not only a plan to minimize taxes, but also the softer issues, such as which person in the company fills which role, what is to occur in the event of an emergency (such as the death or disability of the president) and what the guidelines are for promotion of family members to positions of authority.

These issues frequently involve an understanding of the effect of such decisions on nonfamily employees, as well as within the family circle itself. A number of consultants specialize in giving advice to family-owned businesses, and if the engagement reaches that level of complexity, the client may retain one to assist in the process. A CPA and/or financial planner should also be utilized, especially if they have many years of experience with the company.

As with any estate planning service, the first step is for the client to clearly establish his or her goals, without being unnecessarily confused with complicated techniques that may not be used. Once the client's goals are known, the proper tools can be reviewed and selected. Avoid a cookie-cutter approach, such as insisting that the only way to reach the goal of a transfer of a business is through a family limited partnership.

In general, business succession planning involves three basic questions.

* Who can run the business?

If the current owner is no longer able or willing to run the business, who is best suited to manage it? Does it have to be a family member, and if so, what additional training and grooming are needed?

If it does not, how does the owner give that nonfamily manager an incentive to remain?

* Who controls the business?

This is a different question than who can run the business. The one running the business should be given the title and authority (e.g., president, CEO), but does not necessarily have to have ultimate control. This, of course, resides in the directors and shareholders.

Be creative and flexible in these arrangements. It is certainly possible for family members to retain all of the stock and seats on the board of directors while running the company with a nonfamily CEO.

* Who benefits?

Once the owner has decided who can best run the company, as well as who has ultimate control, the next question is, who benefits from its success? The issue of trusts must also be considered.

Attorneys frequently prepare documents that provide that a business will be owned by a trust after the death of the owner. However, is this practical? Does the trustee want to make the decisions of hiring directors and officers to run the company?

What if it is an institutional fiduciary, which may not want to serve in that capacity? One can readily see the myriad issues that are involved.

Once these basic questions are answered, the owner and the succession planning team can begin to review specific techniques, including:

1. Recapitalization of the company into voting and nonvoting stock

2. An installment sale by the senior generation to the younger generation

3. Private annuity

4. A grantor-retained annuity trust (GRAT)

5. Redemption of the senior owner's stock by the company

6. Shareholders' agreement.

Many family businesses fail after the death or disability of the primary owner because there is no plan for new leadership, because of estate taxes or for other reasons. These failures can often be avoided by proper planning by the owner during his or her lifetime.

DAVID L. WATSON s a partner at Gambrell & Stolz LLP in Atlanta. He practices in the areas of taxation, wealth transfer, business succession, probate and business planning. Reach him at (404) 223-2209 or Dwatson@gambrell.com.