SFDB Plan Success Story Highlights

  • The clients made a $641,000 contribution gaining a $289,000 tax savings (45% tax bracket).
  • The plan added $1.5 million of life insurance coverage.
  • The financial advisor will receive at least $381,000 of new AUM each year for the life of the plan, in addition to the life insurance sale.

A few months ago, we discussed split funded defined benefit plans. These plans (also known as SFDB plans or cash balance plans) are possible solutions for successful small business owners or partners looking for large tax deductions and ways to boost retirement savings. When George and Susan needed a retirement and tax strategy, their financial advisor looked to their Mercury Financial Group Planning Specialist who suggested a split funded defined benefit plan.

Understanding Split Funded Defined Benefit Plans

The Clients

Husband and wife, George and Susan (ages 63 and 62), own a successful family business which employs 14 staff including their son and daughter. George and Susan began thinking about retiring in five years and passing the business to their son and daughter.

Challenges

While George and Susan were eager to retire, they realized that they had reinvested much of the company profits. Because the business was quite profitable, and George and Susan had contributed approximately $600,000 pre-tax per year for 5 years to a custom pension plan, they needed to accomplish the following:

  1. Contributions must be income-tax deductible
  2. Accumulate as much retirement income as possible
  3. Include life insurance as one of the assets to protect the wealth transfer

The Solution

To address their goals, the couple’s financial advisor contacted his Mercury Financial Group Planning Specialist to develop the right solution. The advisor arranged a meeting with George, Susan and the planning specialist to secure an employee census of the couple’s business.

Using the census information, the planning specialist researched options and recommended a split funded defined benefit plan. The specialist and advisor worked closely with a third-party administrator (TPA) to perform the actuarial testing and designed a custom plan which addressed George and Susan’s challenges and concerns.

Custom SFDB Plan Details

The advisor, planning specialist and TPA set up a split funded defined benefit plan add-on to the current 401(k)/profit sharing plan already in place.

An example of how a slit funded defined benefit plan worked for small business owners

Results

George and Susan now look forward to a comfortable retirement, confident they can pass the business on to their children under favorable financial terms, while ensuring sufficient retirement income for themselves.

Benefits Recap

  • In a 45% tax bracket, the $641,000 represented a tax savings of about $289,000 with George and Susan realizing about 94% of the contribution for themselves.
  • The SFDB plan provided George and Susan with approximately $1.5 million of life insurance coverage.
  • In addition to the life insurance sale, the Financial Advisor will receive at least $381,000 of new AUM each year for the life of the plan.

Do you think split funded defined benefit plans might be right for some of your high-net-worth clients? Download this SFDB Plan Client Profile Sheet to find out.