Helping the Business Navigate Rough Seas

In other cases, the inability to secure an able and willing third-party to run the company can lead to its cessation. Berg cites a sole proprietor of a small communications company who, though near retirement, can’t find a buyer because he occupies a highly competitive field.

“The human factor is not easy to deal with,” says Berg. “I have very difficult discussions with clients, particularly individuals I’ve known for a long time. We have to try stay objective and focused.”

When the financial situation reaches critical levels, the business may have to tap existing capital assets or credit lines to keep operations running. One source of ready money, say advisors, is the cash value accumulation of life insurance policies used to fund non-qualified retirement plans.

Minnich says the cash component of whole life policies underpinning executive split-dollars plans proved crucial to the life of two clients that had hit on hard times: one a 200-employee engineering firm in the rubber industry; the other a trucking company owned by two brothers.

To be sure, the cash infusion came at a cost, both in terms of a reduction in the executives’ retirement assets and in interest the businesses had to pay on the policies loans. But Minnich emphasizes that the policies bought time for the companies. If and when their financial position improves, they can replenish the retirement accounts.

For many more troubled firms, the hurdle is not is to restructure existing insurance policies or financial plans, but to establish them. To that end, the advisors’ ability to build maximum flexibility into funding vehicles is key, observers say.

Conte suggests, for example, selling the client a combination of permanent and low-cost term insurance, incorporating a provision in the term policy that allows for later conversion to a cash value policy. He also advises leveraging universal and variable universal life contracts that permit businesses to adjust premium payments, and the rate of cash value accumulation, as financial conditions warrant.

Still greater flexibility can be secured by adopting option ‘B’ (or ’2′) of UL and VUL products, wherein the policy’s death benefit increases in lock-step with the policy’s cash value. These contracts are substantially underutilized, Conte claims, because of the widespread misperception that they have to be more expensive than option ‘A’ policies that maintain a level death benefit.

“If you structure the policy properly, you don’t have to pay a higher premium,” Conte insists. “You give up a little in cash value build-up early on because the [premium payments] buy more life insurance. But isn’t that what clients’ want?”

Because of their flexibility, Mark LaVine, president of Professional Planning Corp., Woodland Hills, Calif., also favors UL and VUL policies for his Special Tax-Advantaged Retirement (STAR) plans. But he notes these are the not the only vehicles that lend themselves to cost-cutting.

Qualified defined benefit and defined contributions plans, he says, are also flexible in that employers can adjust the percentage of their contributions. And, depending on ERIRSA requirements, the employer can skip or boost contributions as necessary.

Such adjustability in benefits may be small consolation to executives, however, particularly those employed in highly volatile and competitive industries who fear their companies will be unable or unwilling to meet deferred or supplementary compensation arrangements.

To allay their concerns, Minnich advises business owners to establish a Rabbi trust to hold the retirement plan assets. Though the irrevocable trust is subject to the claims of an employer’s creditors, the trust protects employees from a change in company control (e.g., due to a sale by shareholders to a third-party owner whose new management opts not to honor the commitment).

Minnich observes, however, that the Rabbi trust is “double-edged sword.” While assuring executives a source of funds upon retirement, they give up access to plan assets while employed.

Concerns about retirement funding can pale in comparison to unexpected developments, such as the long-term disability of a key employee. Given the probability of suffering a long-term disability — nearly one in five people are disabled for five years or more prior to age 65, according to one study — Minnich strongly advises owners to buy insurance that provides disability income and funds to replace the disabled principal.

“Most clients and planners blow by this,” says Minnich. “One reason is that, unlike life insurance, there is no cash build-up in the policy. But this insurance can be critical.”

‘Most clients and planners blow by this…’One reason is that, unlike life insurance, there is no cash build-up in the policy. But this insurance can be critical.’