A Tipping Point Solution: The Business Continuation Retirement Partnership

The business owner market can be both a rewarding and vexing undertaking. Most seasoned producers recognize that the principal share of an owner’s net worth can be tied up in the business. For this reason, these assets represent the primary way to help an owner meet his or her business, retirement and estate planning goals. While it is relatively easy to identify these objectives, it is less obvious how to help the business owner bring these goals to fruition.

This opportunity soon proves elusive and becomes much like the proverbial double-edged sword. The number of lucrative sales possibilities tempts the producer to offer a plethora of seemingly viable solutions. The result–too many solutions–leads to resistance and inaction on the part of business owner clients.

While the desire for effective planning solutions exists, business owners have little patience for multiple shortsighted solutions that serve to complicate, rather than simplify their busy lives. The lack of a straightforward, targeted approach will keep them perpetually stuck on the tipping point between inaction and action.

The key is to assist business owners in attaining their planning needs with a solution that can be leveraged to reach their personal goals. Unfortunately, conventional approaches offer something less than a complete solution.

Hazards of traditional techniques

Traditional buy-sell planning typically involves a cross-purchase, stock redemption or trusteed arrangement. While each can be effective in transferring a business interest, these techniques are also encumbered by drawbacks that may lead to unfavorable tax treatment or prove unwieldy in application.

Redemption plans have the benefit of one policy per owner, all controlled and owned by the business. Yet these arrangements often fail to allocate a full increase to the survivors’ basis. Even flow-through entities, such as S corporations, may fall short of providing a full increase in basis to the extent that insurance proceeds are allocated to the deceased owner’s interest.

Another possible drawback is the alternative minimum tax, which may adversely impact the treatment of death proceeds in a C corporation. Moreover, a transfer of policies to corporate shareholders at retirement may have adverse tax consequences while the “attribution” rules can generate unforeseen estate planning issues.

Cross-purchase plans contain their own shortcomings. The technique allocates a full step-up in basis to the survivors, although younger and healthier owners pay more than their proportionate share of premiums, since they own life insurance on the older and less healthy partners.

Also, because each owner must own a policy on the others, multiple polices can prove unwieldy if the business has more than two owners. Finally, since the company will have no direct control over the life insurance, the policies are not a balance sheet asset of the company.

Trusteed buy-sell strategies, often offered as an alternative to the other techniques, contain latent transfer for value issues upon the transfer of the deceased’s ownership interest to survivors.

The inconvenient truth is that none of these solutions may fully address the needs of the modern business owner. What’s needed is a strategy that preserves the best traits of these solutions, while meeting the owner’s retirement and estate goals.

The challenge is to transform inaction into action by moving business owners beyond their tipping point with a focused and elegant strategy. The business continuation retirement partnership (BCRP) may represent just such a solution.

The tipping point solution

The Structure. Using a BCRP, the owners enter into a typical wait-and-see agreement with the primary business entity. This is accomplished by giving the first option to purchase the deceased’s shares to the business. The surviving owners can then purchase the remaining interest. The company retains the ultimate obligation to redeem un-purchased shares.

The surviving shareholders must have an option, but not the obligation, to purchase the ownership interest. If these owners have a legal obligation to purchase the deceased interest and fail to do so, then the corporation’s purchase would be treated as a dividend to the survivors because the corporation would be deemed to have discharged their obligation.

A general partnership or LLC taxed as partnership will act as owner, premium payer, and beneficiary of one policy on each business owner. Note: A partnership formed solely to hold the policies may not pass IRS scrutiny as it relates to a valid business purpose. Consequently, only an otherwise valid partnership should be used for this technique. Fortunately, many business owners use partnership entities for real estate ventures, lease-back arrangements and other investment purposes.

The partnership agreement provides that upon the death of a partner, the deceased owner’s interest in the partnership is transferred to the BCRP. The partnership will then pay the deceased partner’s estate an amount equal to the deceased’s partnership interest, including the deceased’s share of the value of life insurance policies on the survivors.