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Business Succession Planning:

Business Succession Planning

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Negotiating a Succession Plan

 

Simple Succession Plan:

Simple Succession Plan

 

Complete Succession Plan:

Complete Succession Plan

Strategy

Financial Needs

Insurance Funding

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One Page Strategy:

One Page Strategy

Asset Needs

Liability Needs

Personal Needs

Who Pays the Premiums?

Valuing the Business

Simplifying the Valuation Issue

Equity vs. Loan Capital

 

One Policy Strategy:

One Policy Strategy

Flexibility

Dual Role of Personal Cover

Dual Role of Debt Red'n Cover

Security & Tax-Effectiveness

Cost Savings

Pre-Agreed Purchase Price

Apportionment of Premiums

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Multiple Policy Approach:

Multiple Policy Approach

Super Fund Ownership

Tax Disadvantages

Cost Disadvantages

Other Disadvantages

Geared Premium Funding

Super Buy/Sell

 

One Page, Two Policy Strategy:

One Page, Two Policy Strategy

 

Other Issues:

Tax Deductibility

Inadequate Insurance Proceeds

Vendor Finance

Changing Needs

Future Growth of Equity

Trauma Buy/Sell Strategy

 

Sole Proprietors and Families:

Sole Proprietors and Families

Overview

Family Ownership

Sale Strategies

Third Party Buy/Sell Strategies

Estate Equalisation Strategies

Family Buy/Sell Strategies

Second Generation Strategies

Debt Reduction Strategies

 

 

Cost Disadvantages of Super Fund Ownership

 

This page focuses on some of the cost implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

Overview of Super Fund Ownership

Click here for an overview with respect to Super Fund Ownership.

Tax Issues

Click here for an analysis of some of the Tax Issues with respect to Insurance Cover held in the Superannuation environment.

Other Issues

Click here for an analysis of some of the commercial, personal, family and other implications and disadvantages with respect to Super Fund Ownership of Insurance Cover.

 

Income Tax Liability of Super Fund Cover

Click here for an analsyis of some of the tax issues with respect to Insurance Cover held in the Superannuation environment.

If the Member is aware of the possible tax liability with respect to the Insurance Proceeds, they can "gross-up" the Sum Insured in order to fund the appropriate net amount after tax.

 

Grossing-Up the Sum Insured and the Premium

It is normal for a Life Insured to determine the amount of the Insurance Cover they want by the desire to fund a particular target capital amount required to fund living expenses or other needs (e.g., the repayment of a home loan or personal investment loan).

If the Cover is held outside Super, there is no tax liability and the amount of Cover can be the same amount as the target capital amount.

For example, if the Life Insured wanted to repay a home loan of $1 million (so that the family could retain ownership of the home debt-free), it would only be necessary to have $1 million Cover.

If the Cover is held inside Super, the amount of the Cover needs to take into account the anticipated tax liability.

If the Life Insured wanted to achieve the same target capital amount, they could "gross-up" the Sum Insured to allow for the anticipated tax liability.

This strategy would also gross-up the Premium or cost of the Cover.

Thus, the desire to obtain a tax deduction for the Premium makes it necessary to pay a higher Premium in order to achieve the same target.

The amount of the gross-up must take into account the fact that the amount of the gross-up itself will be subject to income tax.

Ultimately, there could be a point where the benefit of the tax deduction for the Premium would be either wholly or largely illusory.

When to Gross Up?

Members must also consider when to "gross up" the amount of Cover.

If they make the decision when they are young, they might have more Cover than they actually need in the short term.

However, the excess will give them a buffer or comfort zone.

If they wait until the risk has manifested itself, they might not be able to obtain additional Cover because of health reasons.

 

Grossing-Up the TPD Benefit

If the tax rate was 16.5%, the Premium with respect to the relevant amount would have to be grossed up by 20%.

If the tax rate was 21.5%, the Premium with respect to the relevant amount would have to be grossed up by 28%.

If the tax rate was 31.5%, the Premium with respect to the relevant amount would have to be grossed up by 46%.

If the tax rate was 46.5%, the Premium with respect to the relevant amount would have to be grossed up by 87%.

 

Grossing-Up the Death Benefit

If it is intended or possible that some or all of the Death Benefit will be paid to a Non-Dependant, it would be necessary to gross-up the Premium with respect to the relevant amount by at least 20%.

This rate would be even higher in the case of untaxed components (e.g., if the Super Fund has claimed a deduction for the Premium).

In this case, the Premium with respect to the relevant amount would have to be grossed up by 46%.

It is often difficult to determine the risk of this tax liability.

When the Life Insured is relatively young, the risk is minimal...for the time being.

However, it increases over time.

The risk is also minimal if they have a spouse.

However, if their spouse pre-deceases them, then the risk increases substantially.

In this case, the risk is dictated by the age and financial dependency of the Member's children.

If the children have ceased to be dependent (or are close to being independent), then the Member should consider placing the Cover outside the Super environment.

 

Bundled Death and TPD Benefits

It is normal for Death and TPD Benefits to be bundled together in the one Policy.

Therefore, if it was necessary to gross up the TPD Benefit, it would normally be necessary to gross-up the Death Benefit as well.

As a result, even though it might have been unlikely that the Death Benefit would be assessable, it might be necessary to gross up the Premium with respect to the Death Benefit as well as the TPD Benefit.

 

Copyright: Ian Gray Solicitor

 

 

Adviser Tip

A Volume Discount on 100% of the total Sum Insured held by the Insurance Trust might be worth more than a tax deduction for 50% of the Sum Insured, even though none of the Cover held by the Insurance Trust might be held in the superannuation environment.

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See more Adviser Tips

 

 

 

Current Marketing Schedule

Current Marketing Schedule

 

Ian Gray travels to most capital cities regularly throughout the year and is available for Meetings.

Please click here to see his availability in Brisbane, Sydney, Melbourne, Adelaide and Perth.

Please contact us to arrange an appointment or teleconference.