A COLI Stock Redemption Case Study
The following summary highlights enhancements made to an existing stock redemption plan sponsored by a consulting firm. We deployed a Company Owned Life Insurance (COLI) product to increase the yield and tax-efficiency of their existing financial strategy.
Existing Stock Redemption Strategy
- Consulting firm with 20 equal shareholders
- Subchapter S-corporation
- Firm is required to purchase stock of retiring, incapacitated, or deceased shareholders
Current Planning Strategy
- Regular after-tax contributions made to a sinking fund
- Sinking fund assets held in money market instruments and CDs
- Term life insurance on some partners (non-deductible expense north of $70K/year)
Improvement Opportunities
- Accumulate buy-out savings with greater tax-efficiency
- Enhance the yield of sinking fund earnings without switching to riskier asset classes
- Eliminate non-deductible and increasing term life insurance expense
- Cover all shareholders with life insurance quickly and easily
Updated Stock Redemption Strategy
- Repositioned a portion of sinking fund assets into company owned life insurance (COLI)
- Firm immediately realized an enhancement on their balance sheet (i.e. no expense)
- COLI assets immediately earn an enhanced yield, tax-free
- Cash values can be used to repurchase equity when required (i.e., retirement, no longer able to work)
Death benefits provide:
- Money to fund repurchases at death
- Cost recovery to the company
Ideal Firms
Numerous opportunities exist for conservative, mature for-profit companies to take advantage of a similar repositioning of their conservative safe-dollar liquid assets into COLI. Common industries include:
- Construction
- Consulting companies
- Doctor groups
- Law firms
- Manufacturers
- Marketing firms
- Other firms with multiple partners with buy-out requirements
Initial Questions for CEOs/CFOs
- What are you (your firm) trying to accomplish?
- Who is to benefit? Owners? Executives? Both?
- What is the tax status of the entity (or entities) involved?
Once we have an understanding of a company’s priorities, we can look at a variety of structures that will enhance the liquidity and tax-efficiency of the firm’s safe-dollar assets. Connect with us to design customized business life insurance solutions.
