M&A Retirement Solutions: Charleston, South Carolina; Columbia, South Carolina

Read on for answers to common questions about our program... click on any question that interests you, and the answer will appear immediately below. (To make the answer disappear, click on the question again.)

General questions

Q | Why can't I just place the money in a 401(k) or other retirement program?

A | Qualified plans such as 401(k)s have contribution limits or have to include every employee. The Financed Planning™ program is selective and cannot include every employee. It's designed to provide the owner with a retirement plan to meet his or her individual retirement goals. We provide a retirement program that creates a future income stream that is selective, tax-efficient, stable, and cost effective. It's these four criteria that set Financed Planning™ apart from the alternatives.

Q | Why can't I put the money in any available investment on the market?

A | The available investments in the Financed Planning™ program have been selected by the financial institution to maximize a client's gain while minimizing interest rate and carrier risk exposures. Each investment option is selected to provide principal protection while also providing upside potential.

Q | Why can't I put the money in a variable universal life product?

A | Because variable universal life insurance products are considered new issues under Section 11(d) of the Securities Exchange Act of 1934, placing borrowed funds into a variable product would likely be construed as an agent involved in an arrangement of financing in circumvention of margin requirements. Such an arrangement is a violation of Section 11(d) and related regulations, and would be subject to fines and penalties from FINRA. As such, the financial institution does not permit the Financed Planning™program to be used with variable products and only allows the use of fixed or equity indexed products with guaranteed minimums, which are currently not subject to securities regulation.

Q | Why would I borrow money in order to create wealth?

A | The most common wealth creation strategies utilize borrowed funds. A practical example would be the typical home mortgage transaction in which the buyer borrows funds to purchase an appreciating asset: a home. Over time, the value of the home typically appreciates, while the mortgage remains constant or is reduced. This creates the opportunity for a significant return on the original investment of the down payment and principal amount financed for the property. A similar principle is at work through this retirement program.

Q | Isn't debt a bad thing?

A | It depends. If debt is used to purchase a “non-appreciating” asset like a boat or car, then yes, debt can be bad. If, however, debt is used to purchase an asset that increases in value over time, then debt can be positive. The Financed Planning™ program is designed to not only appreciate over time, but to provide significantly lower levels of risk than other financial products.

Q | How can a plan earn more than I pay in loan payments?

A | The answer is quite simple: compound interest. The loan payments are made on a fixed amount on a simple interest basis but gains are credited on an appreciating amount on a compounding basis. Therefore, while the loan payment amounts remain relatively flat over time, the gains compound: adding interest every year and then computing the next year's growth based on that new sum.

Q | Isn't this basically just "factoring"?

A | No. Factoring is the selling of a company's accounts receivable stream for pennies on the dollar. In factoring, the business owner loses control of his or her accounts receivable, accepting less money now in exchange for less collection headaches later. With a Financed Planning™ program, business owners retain control of their accounts receivable and accept more money now in exchange for reduced headaches later.

Q | Does the financial institution take possession of any of my company's assets?

A | No. This program is not the same as factoring, so the business owner retains full control of the company's assets.

Q | Isn’t this premium financing?

A | No. Common features and principles of premium financing include long-term loans or letters of credit in which the lender sometimes capitalizes annual interest amounts at the end of the year, a requirement for individuals to have investment assets of over $5 million, and a requirement for additional collateral in the form of marketable securities or other collateral in order to make the loan 100-150% collateralized. Outside of long-term loans, none of these principles apply to this program. Premium financing is mostly done for estate planning purposes for large net worth clients, where premiums are usually $2,000,000 to $3,000,000 and higher. Our program loan average is approximately $900,000, and our loans are generally used for long-term wealth creation, asset protection, portfolio diversification, and retirement planning through the use of fixed and indexed interest crediting products with guaranteed minimum returns.

Q | Why is the loan based on a variable rate?

A | Returns in the investment products are interest rate sensitive; therefore, it is important for the loan to mirror product performance. This structure is designed to produce long-term favorable results.

Q | How high can the interest rates go and still make a positive return?

A | Since interest rates on both the loan and the crediting products are variable, they historically have fluctuated along similar tracks, avoiding a negative return due to rate fluctuation. While in the short term there will be periods of positive and negative variance; the Financed Planning™ program is based on the principle of simple versus compound interest strategies. In reality, higher interest rate environments affecting both the loan and the policy are better for the client due to the tax-deferred compounding effect.

Q | How long does it take to make a positive return with this program?

A | It depends on the crediting rate of the insurance or annuity product used. Realize that a simple versus compound interest strategy performs best when given time for the compounding interest crediting effect to produce a significant impact. We encourage clients to allow at least 5 to 8 years or longer of program participation.

Q | Is this program still a viable option when interest rates are climbing and annuity rates are not?

A | Yes, the Financed Planning™ program is based on the principle of long-term simple versus compound interest strategies. If the scenario mentioned above occurs, gains over time will still be realized. Even if annuity rates were well below the loan interest rate, the compounding effect, under historic market conditions, would still cause the annuity value to exceed the amount of the interest paid on the loan given sufficient time.

Q | Why wouldn’t I just do this myself with my local bank?

A | Our financial institution brings the pieces together and provides a turnkey solution for you. We have found that very few clients or other advisors have been successful in delivering this type of strategy without significant infrastructure. In order to implement such a plan, the borrower must find a lender willing to lend you the amount, terms, rates, fees, collateral position, covenants and on-going tracking that will allow the program to persist long-term. If you match these criteria with our financial institution's parameters, you will find our loans to be the most efficient. (Put another way, would you want to do this with an organization that has been offering these programs for more than a decade or a bank official to whom you'ill have to explain the concept?)

Q | Could I get a better rate at my bank?

A | When considering the competitiveness of the loan, it's important to evaluate the terms provided for the rate being paid. A business owner generally cannot get a competitive interest rate on the same loan structure outside of our financial institution because this type of loan program is unique. With our lender's financial partners, they can offer 10, 15 and 20 year interest-only loans designed to mirror product performance with minimal collateral requirements and no personal guarantees. The overall structure of the retirement program is unique and the patent-pending funding method is otherwise unavailable in the marketplace.

Q | Can I get a lower rate by paying an additional fee?

A | Yes, the lender can offer rate buy-down programs. Buy-down payments can range between 1% and 4% of the loan amounts, for which your rate would decrease between 0.2% and 0.6875%. Buy-downs are limited to 4%, but exceptions can be made at the request of the borrower.

Q | In a rising interest rate environment, how does a client make money paying, for example, simple interest of 8.75% only to be credited 5.0 to 6.5% on the life or annuity investment, plus paying for the cost of insurance in a life insurance product?

A | The answer is the principle of simple versus compounding interest, as paid and credited over time. Life and annuity crediting rates historically have adjusted as interest rates move, but they tend to lag short-term interest rate adjustments by 6 to 12 months. Thus, the principle is that with time the investment product’s crediting rate will adjust and produce favorable gains in the products that enjoy tax-deferred growth and, in some cases, tax-free withdrawals.

Q |Is this loan compound interest or simple interest?

A | This is an interest-only loan paid on a monthly basis. It does not have an amortization schedule. As such, it is a simple interest loan. Interest is paid on the principal only and does not accumulate.

Q | Is the credit facility offered by the financial institution as a loan or line of credit?

A | It is a variable rate, simple interest only loan with one or more advances based on the number of premiums being paid into the insurance or annuity product.

Q | How long is the loan outstanding?

A | The initial loan is in force for a 10, 15, or 20 year period and is subject to renewal at the end of the stated term. The goal of the lender is to have the client’s loan in place until retirement, a change of business ownership, death, or disability.

Q | What is the lender's collateral position with my company upon closing?

A | The financial institution has a UCC-1 lien against the borrower’s company and the insurance or annuity product that the loan proceeds are used to purchase (a fixed or equity indexed annuity policy or universal life insurance policy).

Q | What happens if my business is unable to make the loan payments?

A | There are a wide range of options for businesses that, for one reason or another, are incapable of making a payment on their loan. Each situation is handled differently. In general, the financial institution works closely with clients who experience cash flow strains in order to improve the likelihood that they will be enabled to continue taking advantage of the program and its many benefits.

Q | What happens to my program if the financial institution goes away?

A | The program continues for the duration of the loan through Wells Fargo National Association, which acts as the collateral agent and back-up servicer. This arrangement was designed to create a ratable transaction in the structured credit markets, and extensive due diligence was conducted by Wells Fargo, Dresdner Kleinwort Wasserstein, and Comerica Bank on contingency plans in the event of a failure of the financial institution.

Q | Can I put my money from the loan into a trust?

A | Yes, the loan proceeds may be placed into an approved insurance or annuity product of one of the authorized carriers for which a trust can be designated as the owner. You can also place the product into a trust after the plan is implemented, as long as an irrevocable assignment or an irrevocable beneficiary designation is not used. Once the loan is repaid, the client can place the product into an irrevocable trust, employing an irrevocable beneficiary designation or assignment. If the trust ownership is desired you should notify your advisor at the beginning of the program approval process so your advisor can coordinate with your legal representative.

Q | What happens if I sell my business?

A | There are potential benefits associated with participation in the Financed Planning™ program when a borrower sells his or her business. Assumption of a debt by a buyer will generally constitute purchase price and can generally be treated as capital gain and result in potential installment sale treatment. In addition, by assuming the debt under the Financed Planning™ program, a buyer has an additional source of funding for the purchase without having to provide cash. The ability of the seller to fund a portion of the purchase through assumption of the debt may expand the number of potential buyers. However, purchases of businesses are complex transactions and any seller should rely upon the advice of competent legal and financial advisors for all aspects of selling their business.

Q | What is the cost if I want to unwind my Financed Planning™ program loan?

A | If you wish to unwind the program and keep your insurance or annuity product, you would be subject to a loan prepayment penalty of 1% to 5% in the first five years of the program. If you wish to surrender the policy as well, you could be subject to applicable policy surrender charges. The terms of the contract and the time of the surrender would determine the amount of surrender charges and prepayment penalties that would be assigned. All prepayment penalties and surrender charges will be defined for you prior to entering the Financed Planning™ program. We encourage you to participate in the program only as a long-term strategy.

Q | What are the options available at the end of the Financed Planning™ program?

A | Generally, the borrower may use the business assets, collect outstanding accounts receivables, sell the business and use the proceeds, or use other available assets to pay off the loan. You may also choose to pay the balance off with a portion of the assets from the Financed Planning™ program product. The program can also be structured at inception to potentially replace other assets that may be used to repay the loan. Once the loan has been paid off in full, the remainder of the monies in the Financed Planning™ product will be available for use by the individual participant.

Q | There are several owners or partners in my business. Do we all have to participate?

A | No, you only need to have an officer of the borrowing company sign the loan closing documents with the consent of the board of directors. With that, one or more owners/employees may participate and an indemnification or hold harmless agreement executed by the participants in favor of the non-participants can be used to further protect those who do not wish to participate.

Q | Can a limited liability company (LLC) engage in a Financed Planning™ program?

A | Yes, we can employ the Program with S corporations, C corporations, LLCs, and, in most cases, limited partnerships. However, the LLCs must be multi-member, not “disregarded” single member LLCs.

Q | Can the financial institution lend to not-for-profits (e.g. 501(c)(3) entities)?

A | Yes, the financial institution can lend to corporate entities regardless of its tax status.

Q | When can I start withdrawing money out of the insurance or annuity product?

A | Clients are generally not advised to withdraw monies out of the policy until completion of the program. Such withdrawals will adversely impact the simple versus compound interest strategy that is fundamental to the program. However, if special needs arise, the financial institution will consider granting such withdrawals in its discretion on a case-by-case basis.

If using accounts receivable as collateral

Q | Does my company lose control or ownership of its accounts receivables if I chose to use them as collateral?

A | No, the lender only makes a UCC-1 (Uniform Commercial Code) filing listing accounts receivable in the state of domicile of the borrower. This filing does not interrupt the collection of the accounts receivable by the borrower. Accounts receivable continue to be charged and collected in the same manner as prior to the client entering into the Financed Planning™ program, unless the borrower defaults, at which time the lender may collect against the accounts receivable and/or the policy.

Q | What happens if the accounts receivable value drops?

A | The lender has a collateral interest in the insurance/annuity product purchased with the loan proceeds. Fluctuations in a client’s accounts receivable are natural in the ordinary course of business. The lender's underwriting criteria contemplate these fluctuations, which are generally not a source of concern as long as the borrower stays current with his or her monthly interest payments. The lender requires periodic financial information from the borrower throughout the term, similar to any other commercial loan transaction.

Q | My company can produce internal reports verifying the presence of accounts receivable. Can you rely on internal reports to verify the accounts receivable?

A | Yes, the lender generally relies upon internal reports to measure and track accounts receivable. The lender is flexible regarding documentation that can be used to verify the accounts receivable.

Q | I have been told that Medicaid/Medicare receivables can’t be assigned. Can they be used as accounts receivable in the Financed Planning™ program?

A | Yes, the lender will consider the complete value of Medicaid/Medicare receivables as eligible for the Financed Planning™ program. Limitations may exist on the lender's direct collection of these receivables, but a permissible lock-box arrangement would be implemented if a default occurs.

Q | Can income contracts such as leases, rents or consulting agreements be used as accounts receivable?

A | Yes, this is considered a non-traditional accounts receivable opportunity. They will be handled on a case-by-case basis in order to derive the proper amount that can be placed in the retirement program.

Asset protection

Q | Does Financed Planning™ offer asset protection in all circumstances for the assets that are utilized in the program?

A | No, the Financed Planning™ program may afford protection to the value of the premiums placed in the life insurance policy or annuity contract, based upon the creditor protection laws of each state. The UCC-1 lien on the borrower’s accounts receivable (if used) in favor of the lender provides a practical deterrent to creditors seeking to reach the assets of the borrower to satisfy a judgment or other claim.

Q | Why doesn’t my business own the annuity or life insurance contract?

A | There are a variety of reasons: primarily, the possible asset protection element of the program would be compromised and the compensation component of the transaction would be eliminated. It would also eliminate any basis for tax deductibility of interest on the loan, if applicable to your situation.

Tax-related questions

Q | Can my business take a tax deduction for the loan payments?

A | Based on favorable, current regulatory provisions and case law, tax deductions may be permissible. The specific determination of deductibility for trade or business interest expenses should be made by your company’s tax advisor. This program is NOT a tax strategy, but rather a tax-efficient way to move money from your company to yourself.

Q | A CPA prepares my books on a cash basis for tax purposes. No accrual statements are generated. Can I still participate?

A | Yes. The majority of clients are cash basis taxpayers. We can implement a Financed Planning™ program for both cash and accrual basis taxpayers.

Q | If an annuity is used in the Financed Planning™ program, isn’t it all taxable because it is collaterally assigned? I thought that when an annuity was collaterally assigned, the gain was immediately taxable.

A | Generally, when you assign an annuity contract, the tax-deferred inside build-up would become immediately taxable: essentially amounting to a distribution. The underlying legal purpose is to prevent annuity owners from circumventing the LIFO (Last In First Out) taxation of an annuity merely by collaterally assigning it to a lender and borrowing against the inside build-up, avoiding taxation. You can, however, assign an annuity contract’s basis upon issuance without consequence. In order to ensure this tax treatment, the lender limits the assignment to the original amount of the basis (funded amount), expressly excluding policy increases. Otherwise, any increases in cash value may be subject to taxation as ordinary income (distributions from an annuity). That is how this circumstance is handled under the Financed Planning™ strategy, and as such, the insurance carriers do not issue a Form 1099 for your gains in the product. Taxes are paid based on the client’s distributions at retirement, as in any other annuity contract.

Q | Are the financial institution's loan interest payments deductible?

A | Although the payment of interest on loans to procure a life insurance policy or annuity contract is generally not deductible, there is a “business exception” to this rule that may apply to the Financed Planning program. If the interest is categorized as indebtedness to pay compensation, to provide possible asset protection, to enhance retirement planning, to promote business transition planning, and/or provide an employee benefit in the form of employee-owned life insurance, all while providing a strategy that has economic substance with or without the deduction, the chances of a favorable determination as to the allowance of an interest deduction may be enhanced. Individual tax circumstances of each borrower, its owners and employees will differ, and each client’s independent tax advisors and accounting professionals should be consulted to make the determination.

Q | If the interest paid to the financial institution is determined by an advisor or accountant to be non-deductible, will the Financed Planning™ program still work?

A | Yes. It will still work because you are still borrowing money with a simple interest loan and investing it in a compounding tax-deferred product. The deduction only reduces the cost of the program.

Concluding questions

Q | Is there a minimum or maximum loan amount available under this program?

A | The minimum loan amount under the Financed Planning™ program is $100,000. Cases greater than $25 million can be funded subject to insurance carrier requirements and large cases will generally require participation by more than one carrier.

Q | What can I do with the funds once the program is completed?

A | Although a client cannot access the initial deposit until the loan is repaid, the funds that are distributed upon completion of the program can be used for a wide variety of purposes. Some common examples include: retirement income (primary or supplemental), education funding for dependents, estate planning, business transition, or new business acquisition.

Q | How can I find out whether I'm qualified to participate?

A | There are certain restrictions to participation in a Financed Planning™ program. Good credit is a key requirement, as is a history of steady cash flows. Other than that, there is likely nothing stopping you from joining the ranks of business owners and physicians who are taking advantage of this excellent portfolio addition. Please contact us for a review of your circumstances to determine whether you qualify.