A new concept in ‘cashing out’

Owning and managing a successful business in today’s ever-changing world can be an overwhelming task. You want to keep your books balanced and your creditors happy; you want to understand changes in tax law and how they could benefit (or hurt) your bottom line; you want to keep your existing customers happy while expanding into new markets; you want to attract, motivate, and retain quality employees. And wouldn’t it also be nice to relax and spend time with your family too? Did we leave anything out?

We did – and while it may not be number one on your “to do” list this week, given all of your other obligations, it may certainly be among the most important: You want to ensure that following a life changing “trigger” event – for example retirement, disability, or premature death – you have a ready buyer and a ready source of cash to purchase your share of the business.

Probably the most common method of “cashing out” of a business following one of these events is through a buy-sell agreement with your partner(s). There are various ways to structure the buy-sell agreement, including a stock redemption plan, funded with life insurance, where the business buys out your share following a “trigger” event; or a cross purchase plan, also funded with life insurance, where your partner(s) agree to buy out your share.

But there is also a new buy-sell concept that utilizes the benefits of tax-free life insurance and the legal protections of a partnership to ensure a smooth transition of a business to the remaining partner(s) following a trigger event.

Under this concept, each of the business partners – plus the business itself – enters into a general partnership agreement. Each partner purchases a life insurance policy on him or herself and then transfers ownership of the policy to the partnership as his/her capital contribution. For its part, the business transfers cash to the partnership as its contribution, and the partnership uses that cash to pay the premiums on the life insurance policies. In this manner, there are no income tax consequences to either the partners or the partnership.

Now “fast forward” several years. One of the partners decides to retire, becomes disabled or is ready to “cash out” of the business. At this time, the partnership would be terminated. Each partner would receive his or her insurance policy, including its cash value, income tax-free. An equal amount of cash value would be transferred from each partner’s policy to the business, representing liquidation of its capital account – in essence, the amount equal to the total premiums paid. The retiring partner would then keep his/her policy as payment of his/her share of the business, (if the cash value is insufficient to cover the total purchase price, the balance can be paid with an installment note, commercial loan, or other financing arrangement), while the remaining partners – and the business – would immediately enter into a new partnership agreement. The business would transfer its cash to the new partnership; the remaining partners would transfer their policies; and the partnership would essentially continue as before.

In the event a partner died unexpectedly, pretty much the same thing would occur. The partnership would be terminated; the business would receive a portion of the deceased’s death proceeds equal to its capital contribution (premiums paid); the balance of the death proceeds would be paid to the surviving partners or the deceased’s family, depending on how the partnership agreement was written; a new partnership would be established; and the process would repeat itself as before. Cash received by surviving partners may be used to purchase the deceased’s interest in the primary business.

The end result: Each partner has the peace of mind that comes with knowing that, in the event he or she dies, becomes disabled, or decides to retire, there will be a ready buyer, and ready cash, to ensure a smooth transition. A retiring (or disabled) partner knows that, even though outstanding loans will reduce the face amount and cash value of the policy, he/she can take income tax-free loans from his or her policy to meet living expenses or supplement retirement income. And, in the event of death, the deceased partner’s family knows it will be compensated for the deceased’s share of the business; the business will have adequate capital to continue operating for the benefit of the other partners and employees; and it will all happen in a tax-efficient manner.

Sure – as a successful business owner, you have a lot to do every day. But don’t put off planning for what may be your most important concern – making sure the business into which you’ve invested your money, time, and effort, is there to help you, and your family, when you need it the most.

This information is for educational purposes and should not be considered specific financial, tax or legal advice. Always consult with a qualified advisor regarding your individual circumstances.

Winfield C. Greenwood, RFC® is the owner/founder of Redstone Financial Group, LLC, an independent financial services firm based in Las Vegas. He shares his expertise on business and personal financial planning with the RJ every week. Contact him at (702) 475-6363,wgreenwood@redstonefg.com, or connect via Facebook or Twitter.

MGM Grand Plans To Add Retail And Dining To Its Strip Facade
MGM Grand President and Chief Operating Officer Scott Sibella said executives are “discussing redeveloping that entire frontage of the building out to the Las Vegas Strip.” (Todd Prince/Las Vegas Review-Journal)
Boyd Gaming planning new corporate campus
Casino operator Boyd Gaming Corp. has filed plans to build a new corporate campus. The plans call for two 10-story office buildings and a six-level parking garage in the southwest Las Vegas Valley. Boyd Gaming operates The Orleans, the Suncoast, downtown's California Hotel and other properties. The new headquarters would be just a mile from its current main office building.
Bellagio Conservatory transformed to celebrate Year of the Pig
The Bellagio Conservatory Team transformed the 14,000 square foot conservatory to commemorate Chinese New Year, the holiday that marks the end of the coldest days of winter. (Rachel Aston/Las Vegas Review-Journal)
CES 2019: Intro uses sound to connect people
Intro, a startup that is part of the Future Worlds Accelerator in the UK, has an app that uses ultrasonic sound to find people and companies nearby.
CES 2019 Video: CES wraps up another year
Time-lapse video of the action at CES 2019 in Las Vegas. (Mat Luschek/Las Vegas Review-Journal)
CES 2019: Create your own beauty products
Beauty Mix by BeautyByMe is a product that lets you create your own cosmetics and beauty products. (Mat Luschek/Las Vegas Review-Journal)
CES 2019: Picobrew’s home brew machine
Picobrew brings automation to homebrewing. (Mat Luschek/Las Vegas Review-Journal)
CES 2019: Surviving CES
What it's like to spend four days working the mammoth tech convention. (Jason Bracelin/Las Vegas Review-Journal)
Haier’s smart home
Haier presented smart home technology at CES 2019.
CES 2019 VIDEO: Foldimate makes laundry day easy
Foldimate has created a machine that will fold your laundry for you. Just feed it anything you need folded and it will do the rest. (Mat Luschek/Las Vegas Review-Journal)
CES 2019: Opte device corrects skin spots
Opte from Proctor and Gamble is a device for correcting spots and freckles from skin. It analyzes the area for spots and then covers them with a serum of matching skin tone. (Mat Luschek/Las Vegas Review-Journal)
Circa hotel-casino in downtown Las Vegas unveiled
Derek Stevens reveals Circa hotel-casino in downtown Las Vegas. He plans open by the end of 2020. (K.M Cannon/Las Vegas Review-Journal)
Circa, new casino coming to Fremont Street
Casino owner Derek Stevens announces his new property Circa, coming to Fremont Street in downtown Las Vegas in late 2020. (Michael Quine/Las Vegas Review-Journal)
Dreenk My Oeno makes wine suggestions
At CES 2019 in Las Vegas, the Dreenk My Oeno tells you all about wine.
Polaroid One Step Plus camera unveiled at CES 2019
Polaroid has moved into the digital age with its One Step Plus camera with Bluetooth. With the connected app, it turns your smartphone into a remote for the camera, along with filters and features.
Amazon is everywhere at CES 2019 in Las Vegas
Seemingly everything works with Amazon Alexa
LG Smart Mirror helps you dress snazzy
LG’s Smart Mirror is less of a mirror but more of an assistant to help get you looking snazzy. It takes your image and recommends clothes for you or matches existing clothes with new clothes, which can be purchased right from the mirror. (Mat Luschek/Las Vegas Review-Journal)
Underwater robots make waves at CES 2019 in Las Vegas
Robosea is a company dedicated to underwater robotics. They produce consumer robots for underwater filming as well as commercial products which can be used for underwater research. (Mat Luschek/Las Vegas Review-Journal)
CES 2019 - Victrola record players spin in Las Vegas
A new spin on an old favorite, Victrola record players are meeting a demand for retro products. The brand is also making furnitures with built-in speakers.
CES 2019: Slamtec robots ready to serve
Slamtec is a robotics company out of China whose goal is to provide solutions for laser localization mapping and navigation. They have created two autonomous robots that can be used in areas such as bars, restaurants and malls. (Mat Luschek/Las Vegas Review-Journal)
Mixologiq drink maker appears at CES 2019 in Las Vegas.
This is the Mixologiq drink maker.
CES 2019: Veritable smart garden
Let’s face it; not all of us have green thumbs. And herbs are particularly difficult to grow, considering their constant need for sunshine. Enter the Veritable smart garden from Exky, which does it all for you. (Heidi Knapp Rinella/Las Vegas Review-Journal)
Bonnie Springs Ranch near Las Vegas being sold to developer
Bonnie Springs Ranch near Las Vegas is being sold to a developer, set to close in March. Bonnie Springs, west of Las Vegas off State Route 159 — next to Spring Mountain Ranch State Park — spans more than 60 acres and was on the market for $31 million. The developer and his project partner are under contract to buy the ranch and plan to chop it up mostly into custom-home lots. The plans includes a 25-room motel, a restaurant and a 5,400-square-foot event barn.
Bone-conduction headphones form Aftershokz
Aftershokz offers bone-conduction headphones - headphones that don’t go in the ear.
CES Happy Hour party at Hangover Suite at Caesars Palace
Conventioneers mingled during the Hardware Massive CES 2019 Happy Hour Bash at The Hangover Suite at Caesars Palace in Las Vegas. (K.M. Cannon/Las Vegas Review-Journal) @KMCannonPhoto
Autonomous Cars and Futuristic Aircraft Rule CES
Day two of CES was dominated by autonomous cars and futuristic aircraft in the North Hall of the Las Vegas Convention Center.
TekNekSavr fights neck problems caused by smart phones
Atiya Syverson invented the TekNekSavr to help fight neck and head problems caused by strains while typing on smart phones. (Mat Luschek/Las Vegas Review-Journal)
New eyeglasses know if you fall and call for help
The French company Abeye has created eye glasses that will detect if the wearer falls and call for help. (Mat Luschek/Las Vegas Review-Journal)
Company that creates vibrator-like device claims genders bias against CES
Lora DiCarlo is a women-run start-up that creates a vibrator-like device designed for female pleasure called the Osé. This year they were awarded the CES Innovation Award in the Robotics and Drone Category, but a month later the Consumer Technology Association, which runs CES, rescinded the award and their booth. Haddock and her team believe it is a reflection of gender bias and sexism in an industry with a long history of male domination.
CES-Wagz has new pet products
Wagz has three new products to help create better lives for your pets in a digital world. One is a collar with LTE tracking and an HD camera. Also a smart pet door that only lets your pet in and out. Lastly, a device to humanely keep Fluffy out of certain areas of your home. (Mat Luschek/Las Vegas Review-Journal)
News Headlines
Home Front Page Footer Listing
You May Like

You May Like