THE RETAINED EARNINGS TRIFECTA
The One For Three Solution
National Life Insurance Company® | Life Insurance Company of the Southwest®
National Life Group is a trade name of National Life Insurance Company, Montpelier, VT, Life Insurance Company of the Southwest (LSW),
Addison, TX and their affiliates. Each company of NL Group is solely responsible for its own financial condition and contractual obligations. LSW is
not an authorized insurer in New York and does not conduct insurance business in New York.
The companies of National Life Group ® and their represntativedo not offer tax or legal advice. For advice concerning your own situation, please
consult with your appropriate professional advisor. Please also refer to the IRS Circular 230 disclosure at the end of this presentation.
TC88329(0116)3
C Corporation Owners Share Similar Concerns
Managing
Increases in
Retained
Earnings
2
Avoid
Unnecessary
Tax Costs
Provide the
Business with
Protection
Against the
Loss of a
Key Person
Retirement
Income
Personal Life
Insurance
Protection
Three Key Issues
Retained Earnings
Loss of Key Person
Future Personal Needs
3
Consider the Three Key Issues
Retained Earnings
4
Retained Earnings
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Other
Total Assets
Liabilities
$
100,000
xxx
xxx
xxx
xxx
xxx
xxx
$ 1,000,000
Accounts payable
Loans payable
Total Liabilities
Stockholder's equity
Capital Stock $
Retained Earnings $
Total stockholder's equity
Total liabilities and equity
Net Earnings or
Increases in Asset
Value
5
xxx
xxx
$
100,000
10,000
890,000
$ 900,000
$ 1,000,000
Excess Retained Earnings?
Professional C
Corporation
C Corporation
Amount in
Excess of
$250,000
$250,000
Retained
Earnings
6
Must be
reasonable
business need
No business
purpose need
be stated
Amount in
Excess of
$150,000
$150,000
Retained
Earnings
Must be
reasonable
business need
No business
purpose need
be stated
Accumulated Earnings Tax
20%
Penalty Tax
7
For additional information on accumulated earnings, select here.
Reasonable Business Needs
Statutory
Buy Sell
Business Debt
Repayment
Key Person
Executive Benefit
Arrangements
Split Dollar
ESOP Repurchase
Liability
17
Consider the Three Key Issues
Dividends
18
Dividend Distribution
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Other
Total Assets
Liabilities
$
100,000
xxx
xxx
xxx
xxx
xxx
xxx
$ 1,000,000
Accounts payable
Loans payable
Total Liabilities
Stockholder's equity
Capital Stock $
Retained Earnings $
Total stockholder's equity
Total liabilities and equity
Distribution
Paid Out
As A Dividend
19
xxx
xxx
$
100,000
10,000
890,000
$ 900,000
$ 1,000,000
Dividend Distribution
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Other
Total Assets
Liabilities
$
100,000
xxx
xxx
xxx
xxx
xxx
xxx
$ 1,000,000
Accounts payable
Loans payable
Total Liabilities
Stockholder's equity
Capital Stock $
Retained Earnings $
Total stockholder's equity
Total liabilities and equity
Double
Taxation
20
xxx
xxx
$
100,000
10,000
890,000
$ 900,000
$ 1,000,000
Consider the Three Key Issues
Key Person
21
You Know Who Your Key People Are
The
Secret Sauce
Imagination
The Deal
Hard Work
Key Person Loss
23

Loss of Market Confidence

Key Skill Set Lost

Replacement Costs

Clients Could Go to Competitor

Staff Defections

Business Debt / Bonding

Suppliers Could Require Different Payments

Profits Could be Reduced
Valuing a Key Person
Multiple of Salary
Multiple of Profits
Different Methods
Available
Actual Impact
24
Proportion of Payroll
Considering the Three Key Issues
Future Personal Needs
25
Future Personal Needs

Death Benefit Protection

Potential Retirement Accumulations

Living Benefits
The ability of a life insurance contract to accumulate sufficient cash value to provide retirement income will be dependent upon the amount of
extra premium paid into the policy, and the performance of the policy, and is not guaranteed. Policy loans and withdrawals reduce the policy’s
cash value and death benefit and may result in a taxable event. If remaining policy values and scheduled premiums are insufficient, additional
out-of-pocket payments may be needed to keep the policy inforce. Surrender charges may reduce the policy's cash value in early years.
Living Benefits are provided by no additional premium Accelerated Benefit Riders. Payment of Accelerated Benefits will reduce the Cash Value
and Death Benefit otherwise payable under the policy. Receipt of Accelerated Benefits may be a taxable event and may affect your eligibility
for public assistance programs. Please consult your personal tax advisor to determine the tax status of any benefits paid under this rider and
with social service agencies concerning how receipt of such a payment will affect you.
26
Riders are supplemental benefits that can be added to a life insurance policy and are not suitable unless you also have a need for life
insurance. Riders are optional, may require additional premium and may not be available in all states or on all products. This is not a
solicitation of any specific insurance policy.
The Retained Earnings Trifecta
Specially Designed
Business Owned
Life Insurance
27
The One For Three Solution
Key Person
Retained Earnings
And Dividends
Future Personal
Needs
28
How it Works
Business purchases life
insurance
Fund identifiable
need
Cash account is
reduced. Cash
value is an asset.
Policy transferred once
business no longer
needs the policy
Transferred to
insured-employee
Fair market value
included as income
or a dividend
The new policy owner
owns all rights and
benefits of the policy
Right to exercise
riders (if any); use
of cash value (if
any)
Additional
premium payments
may or may not be
needed
29
1 – Reduce Retained Earnings and Dividends
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Other
Total Assets
Liabilities
$
100,000
xxx
xxx
xxx
xxx
xxx
xxx
$ 1,000,000
Accounts payable
xxx
Loans payable
xxx
Total Liabilities
$ 100,000
Stockholder's equity
Capital Stock $
10,000
Retained Earnings $
890,000
Total stockholder's equity
$ 900,000
YOUR
BUSINESS
Total liabilities and equity
$ 1,000,000
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
$
Account receivable
Inventories
Buildings
Land
Equipment
Life Insurance Cash Value $
Other
Total Assets
$
30
Liabilities
50,000
xxx
xxx
xxx
xxx
xxx
10,000
xxx
960,000
Accounts payable
Loans payable
Total Liabilities
Stockholder's equity
Capital Stock $
Retained Earnings $
Total stockholder's equity
Total liabilities and equity
xxx
xxx
$
100,000
$
$
860,000
960,000
10,000
850,000
2 – Key Person
31

Income Tax Free Death Benefit

Provides Financial Cushion

Replacement and Recruiting Costs
Two – Business Owned Insurance Protects
Against Loss of Key Person
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
$
Account receivable
Inventories
Buildings
Land
Equipment
Life Insurance Cash Value $
Other
Total Assets
$
32
Liabilities
50,000
xxx
xxx
xxx
xxx
xxx
10,000
xxx
960,000
Accounts payable
Loans payable
Total Liabilities
Stockholder's equity
Capital Stock $
Retained Earnings $
Total stockholder's equity
Total liabilities and equity
xxx
xxx
$
100,000
$
$
860,000
960,000
10,000
850,000
Two – Business Owned Insurance Protects
Against Loss of Key Person – At Death
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Life Insurance Cash Value
Other
Total Assets
Liabilities
$
$
550,000
Accounts payable
xxx
Loans payable
xxx
Total Liabilities
xxx
Stockholder's equity
xxx
Capital Stock $
xxx
Retained Earnings $
xxx
xxx
33
* Must have complied with the requirements of IRC Section 101(j)
100,000
$
$
1,360,000
1,460,000
10,000
1,350,000
xxx
Total stockholder's equity
960,000 Total liabilities and equity
Income Tax Free
Death Benefit*
$
Increase in
Retained Earnings
With Reason for the
Accumulation
Three – When Business Needs Change
Transfer the Policy to
the Insured
34
Income or Dividend
Personally Enjoy the
Benefits of the Policy
Transfer Policy to the Insured
Include Fair Market
Value as Income or
Dividend
35
Retained Earnings Reduced
YOUR BUSINESS
BALANCE SHEET
DECEMBER 31, 20XX
Assets
Cash
Account receivable
Inventories
Buildings
Land
Equipment
Other
Total Assets
36
Liabilities
$
$
50,000
Accounts payable
xxx
Loans payable
xxx
Total Liabilities
xxx
Stockholder's equity
xxx
xxx
xxx
Capital Stock $
xxx
Retained Earnings $
xxx
Total stockholder's equity
950,000 Total liabilities and equity
10,000
840,000
$
100,000
$
$
850,000
950,000
Personally Owned Permanent Policy
37
Is This Concept Right for You?
1
C Corporation with excess retained earnings
2
Business need for life insurance such as key person protection
3
Desire to reduce exposure to Accumulated Earnings Tax
4
Potential future personal desire for benefits of permanent life insurance
38
Results
Business has life insurance coverage on key person
Possible reduction of Retained Earnings
Possible reduced exposure to Accumulated Earnings Tax
Repurpose insurance to personally owned
39
Next Steps
1
Understand your current business situation, goals and objectives
2
Analyze information
3
Review options and opportunities
4
Implement an appropriate strategy
40
IRS Circular 230 Disclosure
IRS CIRCULAR 230 REQUIRES US TO INFORM YOU THAT THE
ABOVE INFORMATION IS NOT INTENDED OR WRITTEN TO BE
USED, AND IT CANNOT BE USED, BY ANY PERSON FOR THE
PURPOSES OF AVOIDING ANY PENALTY THAT MAY BE IMPOSED
BY THE INTERNAL REVENUE SERVICE.
In the event the advice is also considered to be a “marketed opinion”
within the meaning of the IRS guidance, then as required by the IRS,
please be further advised of the following:
THE ABOVE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION
OR MARKETING OF THE TRANSACTIONS OR MATTERS
ADDRESSED BY THE WRITTEN ADVICE AND, BASED ON THE
PARTICULAR CIRCUMSTANCES, YOU SHOULD SEEK ADVICE
FROM AN INDEPENDENT TAX ADVISOR.
41