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How Insurance Fits into Your Business's Strategic Plan

The ultimate goal of any business' strategic plan is usually to build wealth for its owners. Such plans most often focus on the business operation itself. After all, if a business fails to function as a valuable, profitable entity, other concerns can quickly become irrelevant.

But a successful business (or one hoping to become so) must also make an effort to tie together its planning strategies with the income and estate planning goals of its owners and key executives. A business that ignores these considerations may miss a great opportunity and open itself to problems that threaten continued growth and, ultimately, survival.

This guide identifies a range of considerations that businesses can integrate into their planning strategies. By taking time to review these issues, you can help fulfill the financial needs of both your business and its key executives.

Does Planning Really Make a Difference?

Each business has its own particular needs, which change as it grows and evolves. Two of the most important are offering benefits that serve as incentives to key employees — both within and outside the ownership group — and providing for a financially smooth succession by funding buy-sell agreements.

At the same time, business owners and executives have their own special needs, which undoubtedly also change with time. These needs include finding ways to pass on to their heirs the most money at the least tax cost.

Chart 1 shows the value a business must create under alternative tax scenarios if its owner plans to leave $1 to his or her heirs. Although it provides an overly simplistic analysis, it illustrates how the differences among income and estate tax alternatives can affect the bottom line. Owners who fail to take advantage of the many income and estate tax savings options must build up much greater value to achieve the same results. Remember that under current law, the estate tax repeal will be in effect only in 2010, so depending on it to solve your estate tax problem is not wise. For more on the gift and estate tax law changes, see Estate Planning.

Chart 1 
Income needed to build a dollar of wealth for your heirs1
All taxes No corporate
level income tax
No corporate 
level income
tax, no estate
No taxes
2005 2006 2005 2006
Income earned
by business
$3.42 $3.35 $2.91 $2.85 $1.54 $1.00
Top corporate
level tax (35%)
($1.20) ($1.17)
After-tax income
$2.22 $2.18 $2.91 $2.85 $1.54 $1.00
Shareholder level
income tax
(15% on corporate 
dividends, 35% on ordinary
($0.33) ($0.33) ($1.02) ($1.00) ($0.54)
To shareholder
after tax
$1.89 $1.85 $1.89 $1.85 $1.00 $1.00
Estate tax
(maximum 47%
rate in 2004, 46% rate in 2006)
($0.89) ($0.85) ($0.89) ($0.85)
Remaining to heirs $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
1 The dramatic amounts shown in this chart don't even include any state income taxes or inheritance not covered by federal credit. . 
Source: U.S. Internal Revenue Code

What Role Does Insurance Play?

In many instances, life insurance can play an important role in all of these planning decisions. You can use it to create an overall key employee benefits strategy, to develop a business succession plan, and to integrate retirement and estate planning for owners. In addition, the unique and favorable treatment life insurance enjoys under the tax law may present other valuable opportunities.

This guide will provide you with some new ideas and jog your memory about some issues that may have faded into the background over time. It certainly doesn’t replace personalized, professional advice. Congress is continually weighing changes to income, as well as gift and estate tax laws, which may materially affect some of the strategies discussed here. To ensure both that you tailor each approach to your specific needs and that your plan is completely up to date with the most recent tax laws, seek professional advice before implementing any of the ideas we described.

Call us today to find out more. We can work together with your other professional advisors to create a plan that fits your personal goals and those of your business, or to refine or expand on the strategies you already have in place.

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