Business Innovators Radio - Interview with Paul Stawinski CFF, CLU Founder of CLU Wealth Advisors Discussing Business Continuation Considerations

Episode Date: March 7, 2024

CLU Wealth Advisors is a full-service wealth management firm that specializes in personal and corporate financial planning including comprehensive wealth accumulation and estate planning. Our focus includes clients in the entertainment, fashion, and music industries, high net-worth individuals, and businesses. Our objective is to provide stellar service by communicating with our clients regarding all aspects of their financial lives.Founded by Paul Stawinski CFF, CLU Wealth Advisors, has maintained relationships with clients in ways only a boutique business can, acknowledging and focusing on the individual needs and solutions specific only to them. Our practice centers its Financial Planning strategies around each individual’s investment and Insurance objectives, wealth management needs, and risk tolerance, providing a complete financial platform for our client’s lives. Paul is a Certified Financial Fiduciary.Learn More: http://CLUWealthAdvisors.comSecurities are offered through Garden State Securities, Inc., (GSS). Member FINRA, SIPC. 328 Newman Springs Road, Red Bank, NJ 07701. 732-280-6886. Advisory services are offered through Garden State Investment Advisory Services, LLC, an SEC-registered Investment advisor. CLU Wealth Advisors is an independent branch office affiliate of GSS and GSIAS.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-paul-stawinski-cff-clu-founder-of-clu-wealth-advisors-discussing-business-continuation-considerations

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with this Paul Stavinsky, who's the founder of CLU wealth advisors, and we'll be talking about business continuation considerations. welcome back to the program.

Mike, thank you so much again for having me. You're welcome. So I like to kind of listen to a phrase and then say, now, this is what I'm thinking. So when I hear business continuation, I'm hearing you've started a business, you've grown it, you've done all the things over decades, and now you're looking to have some type of exit, whether it's a legacy planning. so what you're trying to think about continuation, but then there's some considerations that happened before that because you need to be, have things in place. So it's not just a matter of

the day you decide to exit. It could be years and years and years ahead of that, right? So tell us a little bit about your vision and approach when you're working with clients on business continuation. Well, I mean, it all begins with, you know, what are you trying to do in terms are growing your business. And there's a couple of things that every business has to keep in mind, which is obviously profitability and market share and making sure your products are right, but also making sure you hire and retain the right employees. And that really brings us into this whole key person kind of an arena.

There's a lot of iterations of what you can do to help retain people, some qualified, some non-qualified. But the bottom line is you need to have some incentive to keep some of these people. And maybe even to attract them in the first place, because I know that in some industries, having that, you know, high-level VP-level type employee that you're trying to hire, you might need to hire them or be the most attractive choice for them. So it would be sort of the same thing, right?

Yeah, exactly. And there's also, you know, a couple of different ways to do that. Obviously, there's qualified plans where people say, oh, okay, you want to hire me, I want a 401K. Great. Okay, everybody goes a 401K. What about a defined benefit plan? Defined benefit plans are not being used the way they used to, which basically means that you're funding an exact benefit at retirement. Those are much more expensive to a corporation, whether it's public or private. And then this defined contribution, which is, okay, I'm going to give you $10,000 a year. We're going to put it into this defined contribution plan. Whatever it earns,

that will determine what your income is going to be. So those are qualified. The problem with those are, you know, the fact that you're giving that money away. You never can get back as a business on it. The non-qualified route, which is probably the one that I recommend, not necessarily first, but in conjunction with any kind of recommendation for a qualified plan, is to have some kind of, you know, key employee golden handcuff situation where not necessarily, you know, that you're going to do this for every employee, but if you have a real key employee that first of all, you know, will help your business. Second, he may or he or she may want to take

over the business. And how do you help them fund that buy out of it down the road? So, you know, we can incorporate all kinds of ways to do that. One of the ones that, you know, obviously becomes paramount is how do you complete three things? First is longevity of employment, second, disability, and third death. What happens in those contingencies? So a key person life insurance, policy, if it's structured properly, first of all, can provide solutions for all three of those events. Obviously, it's going to retain them to begin with or help you recruit them to begin with, and you can make them as generous as you want. There is no IRS sitting down your back saying you have to give X, Y, Z to everyone. The other is you structure them properly. So if there is a disability,

the actual policy will continue to pay and provide the benefits and also reimburse the company. Most of these plans, by the way, are owned by the corporation. It's a promise to the employee. And the third is a death benefit. And the death benefit obviously protects the corporation. And there is sometimes cost sharing so that if, God forbid, something happened prematurely, you agree to pay his or her spouse or beneficiary as an X amount of that. So those are the differences. If you want, we can go into some of the more esoteric forms of non-qualified deferred compensation. And I'll just mention one.

It's a SERP plan, S-E-R-P. It's a supplemental employee retirement plan. Basically, this is a more structured program where you're going to pick a class of employees, not just to say one person. And you're going to say, okay, for this class of executive, let's say, or, you know, program or whatever it is that you want to do,

we're going to fund something for your benefit at retirement or when you have a period, a certain period of employment or goal setting. One of the things that's really important in any of this is to set up some kind of a goal event so that you're not just funding money that you're not ever going to be able to recoup. And the CERP plan is really good for that. The trouble with it is you have to include in certain areas a non-discrimination. You can't just provide it to one or two people and say the rest of them go. that would be a key person policy.

So that's the only downside to it. And also, you know, it's a continual funding and it's on a larger scale, obviously. So we're one thing that I was hearing when you were describing that is there's not one cookie cutter answer, you know, so if you're a business owner and you're thinking, wow, I want to recruit top employees, I want to retain top employees, I should do X. Well, there is no one thing. So that's really important to think about. It makes me wonder, too, is what are some of the tax considerations that would benefit both

the incoming or the existing employee as well as the business owner? Well, the first, you know, I have to go back. Again, I always go back to this qualified versus non-qualified. Obviously, if you're going to do a qualified plan, you have a tax deduction. So the business immediately gets a tax deduction for whatever the contributions are. if the employee makes some contributory contribution to it, then that also probably will be tax deduction. But that's not necessarily the only areas.

You have to consider what the taxation will be at retirement then. And it goes into some of the other subjects that we've covered in other podcasts. You have to be well aware of what's going to happen when you start taking that money out. In the non-qualified sense, there is no benefit going to. in. In other words, there's no deduction. However, you know, the employer has the benefit of the, of having this plan in place. It has a vehicle for it. So he doesn't have to think, oh, my God, how am I going to fund this? And usually, if it's structured properly, at death, at disability, or at retirement, or the end of the event that you're going to start paying these people out,

there are no taxes above. And that's the key. And you have to be careful. You don't want to, you know, violate MEC rules and other things. But the bottom, The bottom line is it can be structured very, very, you know, I guess a lucrative in terms of tax implications. Yeah. And like you said, you've got to just make sure of what the outcome is, you know, like the old saying from Stephen Covey, begin with the end in mind. And I think that's really huge. And you mentioned a key person insurance. And I think that that's something that a lot of times people go.

What do you mean? Insurance. How does that work? So let's talk a little bit about if you put that in place, which will be helpful to help recruit key players, key employees as well as retain them. What happens if they leave the company or even pass away? You had mentioned some of the things like long-term care and things like that. Well, what about just plain leaving the company or what if there is a death? How does that impact both the employee and the business?

Well, I didn't mention long-term care. You just brought it up. That is another area, by the way, that it's now being looked at more aggressively in terms of providing long-term care as part of a key person policy. But anyway, see the question a little bit, as you just asked, you know, the life insurance is owned by the business. And we're talking here about closely held corporations. We're not talking about public corporations.

If you're looking at a public corporation, you're talking about a CERT plan or something qualified. So we're talking here about the 30 million small businesses in the United States. So they own the policy. They own the life insurance, the death benefit. They own the cash value. They're paying the premiums. However, based on a qualifying event, they will pay out, as I said before, to a beneficiary.

Or in the event that it's a key person policy and this person is really, really integral to the success of that business, they retain the death benefit themselves. Now, again, it's depending upon who you're trying. to reward. Are you trying to protect the business against the loss of somebody, or you're trying to reward a key person by giving them a benefit? So there's a couple of ways that you have to look at these policies. But both ways, and you can do it as a hybrid also, obviously. You can have some death benefit going back to the business to pay its costs. The cash value of the life insurance policy, usually almost 100% of the time, is also controlled and owned by the business. So in the event that somebody does leave, then you retain the policy or you retain the cash value that pays you back

the premiums that you put out. That's pretty important. And I know that there's way more detail to get into there, but it tells me from the outside listening in that that's not something where, oh, wow, I lost that key employee, which is devastating to the business. And also that, that, you know, financial tool that I put into place that went with them. there are some security precautions that can be put into place that benefits the employee while they're there. But then also if some things progress, it also protects the business.

Correct. And these policies, again, as I said, I don't want to be redundant, but they are usually owned and controlled by the corporation. Yeah. The event that someone does leave or there is kind of a situation where the policy is no longer necessary, they can keep it, obviously, and continue to pay the premium since they're the owner. The employee may not be real happy about having a death benefit on his life. However, there's no reason why they can't continue it. Or there may be a life settlement opportunity, which is something I've been doing a lot, a lot more of in the last four or five years where you can actually go out and sell an existing life insurance policy for a percentage of the death benefit. Usually it's 25 to 50 or 75, depending upon if there's any health issues. But the

bottom lines, there are avenues of escape, so to speak, for the business in the event that someone does meet and they have a key person policy. So you've also mentioned buy sell agreement. So give us a little overview of what that is and why is that so important for a business? Well, again, you know, this is business continuity 101. What are you going to do in the event that something happens and you or your partner or a group of people are no longer there to run the business. What happens to it? You know, do you, does it go to your wife? And your wife has no idea what you're doing in that business or vice versa. Your husband gets this business that you set up over five or six years with a other employer, other employee that

you are partners with. You know, they don't want to walk into this. Your partner certainly doesn't want them to walk into it. Believe me, because they have nothing about the business just going to cause complications. So you set up a buy-sell agreement or you should. I don't think enough small businesses really, really think about continuity at the point of death or disability. And again, that's the real key. But if you are thinking about it, then you have to think about it in three different ways. There's three different buy-sell scenarios. The first one is wait and see, which means I'm not going to do a damn thing.

I'm just going to wait and see what happens. Well, that's probably the worst thing you could ever do in any situation. Don't do any planning. The second two are really the choices that you have. First is what's called a cross-purchase agreement. A cross-purchase is really kind of simple. It's almost defined in the word. If you have two partners, I'm buying a policy on you, you're buying a policy on me. In the event that I die, that policy pays to buy my estate out of the business. So you have a completed prophecy. In other words, the business goes to the surviving partner and the money goes. goes to his or her beneficiaries. Very clean. The problem with, you know, buy-sell agreements, or at least in the cross-purchase area, is if you have more than three or four or five partners, which is, you know, certainly very feasible nowadays, you become overly burdened with a number of policies that you need. You have five partners. That's 20 policies you have to write in order

to have everybody have the right percentage of ownership and reimbursement. The other problem. And again, this is nothing more than, you know, we're all aged. In other words, you know, you could be 60, it could be 50. If you have a partner that's 40 and 160, there's a discrepancy in age and then a discrepancy in premium amount. So that you have to equate somehow. But all of these things are easily done with a, you know, a professional that knows how to do it. Now, again, buy-sell agreements, the only other one I would suggest you even think about is something called a stock redemption. Very, very clean, meaning that the employer. lawyer, the business, owns a policy on each partner. Their percentage of ownership dictates the

face amount and the premium in their age, obviously. And then the business owns it in the event again of a death. They buy out the remaining partner's assets from the estate and they continue the business. All of these plans, by the way, need to have an attorney's input to draw up the documents. Just to have a life insurance policy is great, but there's going to be arguments and awful lot of legal battles if you not have an absolutely written agreement. So the policy is one step, and then the legal documentation directing what to be done with it in certain events is the other step. Yeah, without a doubt. Yeah, yeah, for sure. You know, everything that you do, you have to have planning and you have to have the input of professionals that know what they're doing.

You know, and the cost associated with, you know, setting up and purchasing a life insurance policy are minimal compared to the potential headaches and loss of money if you don't have it. You know, that's one of the biggest, you know, oh, I don't want to spend X amount of dollars a year and, you know, God knows what will happen. I said, well, the answer to that is really simple. What happens if you don't do it?

Yep. Yeah, what you don't do is you're going to come up with money, you have to come up with money immediately or within 12 months, let's say, that you have no idea what it's going to come from. And even if you did, it might be better served wherever it sits and then that causes another domino effect. Well, that's the liquidity events. What are you going to do? You can sell off half your inventory.

You know, that's the problem. And somebody's wait and see by sales, which I get, believe me, I have clients to tell me, well, I just don't want to go down that road. And I, you know, a year so later, I'll come back to him and say, Have you considered, if you had to have that happen today and your partner died, where would you get the money to buy out their estate? And the answer is they don't know. Yeah. And that's usually where we come to the point where let's reinvestigate what it would cost.

You know, and the other thing is you don't necessarily have to buy a whole life or universal life, although I would definitely recommend that's the way you do it because you have that cash value building up, which would pay you the premiums that you laid out. But you can buy it with simple term insurance. And again, if you have a finite period, time insurance has its place. You know, when I hear you describe the buy-sell agreements of like cross-purchase or stock redemption and you think, well, which is better? And the answer, I'm sure I'll go and answer it for you. It depends. You know, so again, we keep coming back to it all depends on the business, what they're in need is,

you know, what, what their, what their setup is, and you have to, have to talk with someone that can extrapolate that and give some great options. So I'll kind of think, you know, so, so I know you would agree with that. But, but my question is, can you explain also an example or a case study of, you know, maybe a buy sell agreement that went well, maybe a buy sell agreement, you know, that didn't go well, where someone did some pre-planning and it and it just came together smoothly or, oops, they didn't plan it the right way. And here's what happened. Yeah, it's very, very clear in my mind, unfortunately. I'll give you the good news first. The good scenario was that there was two people that were partners in a corporation, a very successful one, probably worth about $7 to $10 million, depending on what the day was that you valued their business. And we had written some universal life, indexed universal life for the purposes of a buy-sell. it was only two years old, frankly, when one of the partners died.

And immediately, I get a phone call from the surviving partner saying, is the life insurance that you wrote in effect? And I said, of course it's an effect. He said, because I don't have any money to buy out his wife. That was like a mind-blowing opportunity for me. I was very happy that certainly I had talked to them about doing it. I'm glad they said yes to doing it. But it was so important in this person's life, he didn't know what he would do if he didn't have it. So, you know, I've seen it happen. Unfortunately, they were very young when this happened. They were good friends of mine. So, you know, when I lost a friend, it was hard. But more importantly, I was happy that his wife was taken care of. His children were okay. They could go to college. They had a substantial buyout from the ex-partner. And most of it, not all of it, but most of it was funded by life insurance. That's a good scenario.

Yeah. The other one, it was not so good, and it happened to be very close to home. My father owned a company called Mohawk Machine and Tool Company. He was an inventor, and he was during World War II. He worked on the Norden bombsite, and his, he was very an engineer, in other words. He was a tool and dime maker. But back then, that was the electronics of the 1940s. So he was very cutting edge back.

My father went blind, and he had two employees that were, you know, good engineers, that frankly could have taken over if he had planned properly. And unfortunately, my father became disabled. And that's the other thing, by the way. It's not just death. In these situations, you can have a disability rider, which will actually take over, pay the premium, or complete the prophecy so that you don't have to fund it

and you have some income that can go to the disabled partner. But anyway, that's the problem. My father didn't have anything. And he tried very hard to keep. it. But again, he had no funding for it. And eventually he lost the whole business and that people for them, unfortunately, also lost their jobs and their livelihood. And it was a shame because my father had a very, very successful business. But, you know, given life, it happens, it didn't work out real well. So it's close to home.

You know, it really is. And unfortunately, it's not so obscure like the Earth might get hit by a meteor, you know, like that's really remote. But what you just described, that can happen. And it has happened. And especially when you can describe it that happen right to your family. So these are things that that just literally make sense. And it's, and it's something that should be put into consideration. And if structured the right way, even if there wasn't the employee that leaves or dies,

then those financial tools still are providing benefit to the business owner. So it's almost like you're making. a wise financial decision and having multiple outcome benefits. Absolutely. And I recommend to each one of my COIs, my senses of influence, which are usually accountants or attorneys, I said, please review your, even if it's, you know, one of the other things, people, well, I have an agreement. I said, great, your attorney brought it up. Absolutely. He's a brilliant attorney. He has all the contingencies all laid out. I said, perfect. But what, what are you going to do to fund it? and that everything goes silent.

Because again, unless you have money to complete it, it's not necessarily worthless, but it doesn't mean much. You're still going to have the same issue. So it's very important. And I don't think, again, most small businesses are focusing enough on the liability that they have. Well, and I'll even throw this in, and I know that you can probably comment with some research as well. but so many times entrepreneurs that are very successful that are running their business, they're a majority of their net worth personally and professionally are tied up in their business.

So, you know, you think about, oh, well, you know, all of my money, I'm siphoning it off into my personal retirement account, you know, the right way. But no, much of their wealth is in the business. So if that is the case, shouldn't there be a continuation strategy in place so that if and when some little roadblocks or hiccups happen, then all of that hard work is protected. Yeah, one of the thing also, if you structure this properly and you do fund it, you have a good attorney that drives the agreement properly, it'll actually give you the business of value so that you don't have to think about, okay, well, what's my business worth? Without you, it's probably not as worth as much as the day before.

So you have to have something written down. And if you have a life insurance policy or some funding vehicle like that, then at least gives you a baseline for the business value, which for IRS purposes, as inheritance purposes, and for the purposes of transferring that wealth to your family, it makes a big difference. Well, Paul, as always, has been a pleasure learning from you. If someone is listening to this wanting to make sure of just some more information they could get from you and maybe even have a second opinion looking at their paperwork and giving some strategies, what's the best way that someone can reach out and connect with you? You can go to my website, which is CLU.

wealth advisors, plural.com, or obviously you can email me at P-J-S at c-l-U-wealth.com. Excellent. Well, Paul, thank you so much for coming back on. It's been a real pleasure talking with you. Thanks, Mike. You've been listening to influential entrepreneurs with Mike Saunders. To learn more about the resources mentioned on today's show or listen to past episodes, visit www. www. influential entrepreneurs radio.