Valuable Finance Insights from Tier 1 Capital

Olivia: Hello, and welcome to the Control Your Cash Podcast. I’m your host, Olivia Kirk.

Tim: And I’m Tim Yurek. 

Olivia: We’re here today to talk about everyone’s favorite topic. Taxes. Just kidding, the dreaded taxes, it’s a huge major capital expense for households and businesses across America. So it is a topic that does need to be discussed because there are better methods than other for funding taxes, or if you’re lucky enough to receive a tax refund, how to put those tax dollars to work for you, your business, and your family.

Tim: You know, it’s funny, I did some research on taxes and found that 91% of all taxpayers overpay on their tax bill. 

Olivia: Now nobody wants to hear that. 

Tim: And here’s the kicker. Over 70% of them overpay by over 70%. So, you know, everybody out there thinks that they’re handling things the best way and that they’ve got the best accountant or the best CPA.

But clearly there’s a disconnect. If everybody thinks they’re doing it right, and 91% is overpaying, something is not adding up, if that makes sense.

Olivia: And then we wonder why the government doesn’t give us a clear cut method or tell us how much to pay in taxes. They’d be losing a huge chunk of their revenue by doing so.

Not to mention, we talk about the five areas of wealth transfer. Taxes are number one. Where are we giving up control of our money unknowingly and unnecessarily? No one wants to pay more in taxes than necessary, but they are something that we need to consider when considering financial planning and how to move ahead for ourselves.

Tim: Yeah. I mean this. So think about this. If you overpay in taxes, you don’t only lose the tax dollar. You lose what that dollar could have earned for you. That’s opportunity costs and you lose it forever. Meaning that not only do you lose it, but your children and your grandchildren and your great grandchildren lose the ability to have controlled that dollar.

So it’s really important to address the tax issue. Uh, but again, everybody thinks they’re doing it right, but there has to be some kind of a disconnect because if so many people are overpaying, and they’re overpaying by such a large degree, something isn’t adding up. And think about this, you know, every few years, uh, a political candidate might run on we’re gonna, you know, we’re gonna reform the tax system.

Nothing ever gets done. There’s no incentive in Washington to reform the tax system.

Olivia: Well, the government doesn’t produce anything. All they have is revenue, and they only, what, what are the sources of revenue? Taxes? Is that it?

Tim: Well, taxes and borrowing. Right? So, so and… 

Olivia: If you can consider borrowing as a form of revenue.

Tim: Yeah, I mean, 33 trillion dollars in debt. What’s another trillion dollars? What the heck? Easy come, easy go, right? 

Olivia: Except it never came.

Tim: But look at all the constituents we could buy off.

Olivia: Oh my gosh. So, yeah, it’s, it’s. The tax money has to come from somewhere because it is expensive to run the country, to protect the country.

And the government’s job is to do just that. And, you know, they have to get paid themselves. So the money has to come from somewhere. And as this debt adds up, as interest rates rise, and they keep on going up and up and up. As these things happen, the cost of the interest on the astronomical amount of debt is increasing, and you know the money has to come from somewhere.

And spoiler alert, it’s gonna come from the people who have the money. If you don’t have any money, the government’s not coming for you. It’s the people who have the money and newsflash again. You may be, it may not feel like it, but you may be those people who are responsible for paying those taxes, whether it feels like it or not.

Tim: You know, I like when people say, hey, the rich should pay their fair share. Well, think about this. Over 80% of taxpayers filed for $100,000 of income or less. Now, guess what? If you make $100,000 in the United States, in 2023. Are you rich?

Olivia: Does it feel like you’re rich is the better question.

Tim: It doesn’t feel like it for sure, but here’s the point when you’re sitting there saying, yeah, the rich should pay their fair share, you’re basically saying, come and kick my butt because I’m rich. Now you don’t feel rich, but as far as the government’s concerned, you make a hundred grand you’re rich.

Olivia: Yeah. Yeah, that that 100 to 200,000 of income has some some real challenges to face between you know all of the problems that everyone’s dealing with as far as rising inflation rising interest rates but then there’s also other layers of challenges that come up between not getting as much for child care or not getting as much for financial aid and paying more for your children to go to college. Not to mention, if you’re in that, that earning bracket, you may have some, some student debt yourself that you need to account for in there.

So it’s really important. We always say to make your money as efficient as possible. And as you continue to earn more and more money, if you don’t address these issues, those problems are going to continue to compound as your income grows. So it’s important to address each of the wealth transfers, starting with taxes to make sure that you’re not paying more than you need to, to make sure that you’re keeping as much as you can, and to make sure that you’re setting yourself up for success here.

Tim: Yeah. And looking at setting yourself up for success, all the strategies that we employ on a daily basis, whether they’re financial or personal, really have a ripple effect on everything else that we do or that we’re able to do in the future. And keep this in mind, you know, when we talk about saving money on taxes, it may not necessarily be you paying less taxes this year.

We have to look into the future and take the idea of deferring taxes into a 401k or a qualified retirement account. Well, it’s a government tax qualified retirement account, which means that all the rules are laid out by the government. They made the rules. Now, keep this in mind, those rules were made to favor the government.

They weren’t made to favor you. Remember Nelson Nash saying in his book, Becoming Your Own Banker. You know, the government creates a problem, high taxes, and then they provide a solution to that problem. The ability to defer your tax into the future. And then they make that first available to the rich, and then to the not so rich, and then to the not so rich, less, even less, and even more.

And then next thing you know, now they have an exception to the rule for everybody. It’s called an IRA. Now think about this. The government creates the problem. The government provides the solution to the problem. Do you think that maybe, just maybe, you might be, you know, you might be subject to manipulation there.

I mean, if they really wanted to solve the problem, what would the solution be? 

Olivia: Possibly to lower taxes. 

Tim: Wouldn’t that be the logical solution? But do you think that’s going to happen?

Olivia: It can’t at this point because every, every splash has a ripple and we’ve got into a very high level of government debt to say the least, and that’s just one layer.

And then adding on the, the rising interest rates on top of that. So it’s impossible for them to slow down now. And it’s just math, you know, at the end of the day, it’s just math. 

Tim: You know, so the, the big thing is people think, and they’re, they’re led to believe by their, accounting or their, their tax people, that if you defer money into this retirement account, you’re gonna save X amount of dollars in taxes.

So let’s say you’re in a 30% tax bracket and you put $10,000 into this retirement account. Hey, you saved $3,000. Eh, no you didn’t. You deferred $3,000 of taxes into the future. Now let’s look at, did you really save money? 

Olivia: It’s funny because. You know, we get, we get calls every single year around tax time where our clients are saying, hey, my accountant said I could save on taxes.

Like I need to get money into my qualified plan. And we’re like, do you have the money accessible to put into your qualified plan? Is that money baked into your cake? Is that in your cashflow to put away 10-20,000 dollars into your IRA? And a lot of the times the answer is no. Right. Cause if it was, then you just pay the taxes, right?

You’d have the money to pay the taxes instead of scrambling to figure out how to save on taxes. At the end of the day, no one wants to pay the taxes. But another thing to consider there. On top of deferring the taxes into the unknown future, you’re also losing access to that money, you know, you’re not that money isn’t accessible before age 59 and a half without penalty and regardless of when you take it out, it’s going to be fully taxable as income at that time.

So if you want to use it to accomplish a financial goal down the line before age 59 and a half, you’re subject to taxes and a penalty. So then you really didn’t save any money on taxes. You know, they’re getting you one way or another. And a lot of times it’s where you’re worse off for it. 

Tim: Well, absolutely.

And now let’s add another layer to that cake. Right. And think of it this way. When you have to pay more for goods and services in the future, not through your own fault. But because the government is printing more money and printing more money just increase, increases the cost of the goods and services that we’re consuming. 

Olivia: Hashtag inflation.

Tim: That’s called inflation, right? So isn’t that, isn’t inflation another tax? 

Olivia: We call it the stealth tax around here because it affects each and every single one of us. Some more than others, you know, the lower your income, the more you’re going to be affected by the effects of inflation that are eroding away at the buying power of our dollars.

And a lot of people don’t consider the effect of inflation on our retirement savings, right? Because we see maybe we’re earning so much rate of return on, on our, our retirement savings, our retirement investments, maybe we’re paying fees, maybe we’re going to pay taxes. But what’s not considered is that when you put that dollar in, in 2023, that’s the most that dollar’s ever going to be worth ever. So…

Tim: Meaning that, meaning that that dollar can buy the most goods and services in your life going forward. 

Olivia: Yeah. 

Tim: Right? As inflation affects those dollars going, that dollar going forward, you’re going to be able to buy less and less goods and services with that dollar. So, but, you know, so now let’s sort of, the picture is starting to come together. You’re told you’re saving taxes, and in the example we used, $3,000 you’re saving in taxes.

And you believe it because that’s what you see on your tax return. Right? This is go, goes back to what Nelson always said, the seen and the unseen. We see the $3,000 we’re saving in taxes. We don’t see at the time of that deduction or the time of that deposit into the account, we don’t see the taxes we’re going to have to pay in the future.

We don’t see or feel the cost of inflation on that money. And, you know, another thing we don’t see or feel is did we make or lose money on that deposit over time? So all of these things paint a picture that oh well, I don’t know what the taxes are going to be in the future. I know that the dollars that I’m taking out of that account down the road are going to have less buying power than the dollars today, but I don’t know how much less.

I don’t know whether or not I’m going to have, I’m going to lose money or make money in that account. Now you’re looking at it and saying, boy, am I saving money? Or am I just greasing the wheels of the, you know, the accounting industry and the financial services industry and the government, and they’re just using my money to sort of advance themselves and me, well, I guess I’m left to sort of sink or swim on my own.

Olivia: And that’s the case. A lot of times. And, you know, a lot of times there isn’t enough money in those accounts for, for someone to retire comfortably. In the past it used to be that your employer would provide a pension and all of that risk was placed on your employer instead of on that individual.

But nowadays, ever since we have these qualified plans and the accessibility to them, all of the investment risk is on the individual. And we’re seeing now how that’s working out with so many people. Unprepared for retirement, you know, whether, whether they’re saving in their 401, 401k or not, you know, um, it’s, it’s sad and it’s something that needs to be addressed as soon as possible so that you’re set up for financial success throughout your life and also saving in a place where the government can’t get their hands on it, you know, a place where, um, that money’s safe and there for you, your business, and your family, and no one else.

Tim: And, and that’s, that’s a such a great point, right? Wouldn’t the best way to overcome taxes be to put your money in a place that the government can’t get at? 

Olivia: Contractually. 

Tim: I mean, how much, how logical is that, that Wait, you mean to tell me there’s a place I could put my money that the government will never be able to get its hands on it?

Olivia: Well, you think about it, like, the government are the ones making the rules. And they’re making those rules frequently, you know, mind you. They’re not just saying, let’s make these rules, set it, and forget it. We see how often the rules have changed between, um, in those qualified accounts. Between the beneficiaries, between the RMDs, between everything.

We don’t know what that’s going to look like down the line. 

Tim: And who do they, who does the government lean on when they’re making these regulations? When they’re changing these laws? When they’re setting up, uh, when they’re setting up, uh, regulations? Aren’t they using the access to the large companies, the ones who are going to benefit the most?

So think about this, the people who are making the laws, right? So, they, they make the rules, they profit from your participation, and they control the outcomes. What chance does the individual or the, or the, the average person or business owner have against the big corporations and the government and the financial institutions?

I mean, it’s, the deck is stacked so far against us that it’s really, really difficult to get ahead. And we’re seeing that more and more today because of inflation, because of taxation, because of the amount of money that the government’s printing. The little guy’s getting squeezed out, no doubt about it.

And just, you know. Rightfully or wrong, wrong, right? Let’s look at COVID. They put the little guy out of business, the small business owner, but you can go to Walmart, you can go to the big corporations, you can go to Target, but you can’t go to Joe’s store down the street. 

Olivia: Yeah, it’s sad, and I’m sure many people are still recovering from those effects, and the effect that it had on their business during COVID, and then after.

But yeah, it’s hard. It’s hard as a business owner, and it’s important to that’s why we always talk about making your money as efficient as possible, setting it up. So, you know, you’re in control of it. You know, you’re not being squeezed by all of those outside entities, all of those, those things that conventional wisdom teach us to do.

And we do so naturally because that’s what everyone else is doing. That’s seems to be the only way, but there is a way to set yourself up and your family and your business so that you could regain control of that. Um, and do it in a tax efficient manner. 

Tim: Yeah. I think you have to realize from this perspective, a lot of what we think to be true about taxes may not necessarily be true.

And if what we think to be true is not true, how soon do we want to know? When do we want to know that what we thought or believe to be true about taxes? This is really not true. Do we want to know now or do we want to know 30 years from now or 20 years from now? 

Olivia: It’s always better to know as soon as possible.

So you could start making those incremental changes. Those, put the ripples in the other direction, if you will, so that you’re moving towards your financial goals rather than being separated from them unknowingly and unnecessarily. If you’d like to learn more about our process. At Tier1 Capital, be sure to check out our website at tier1capital.com. 

You could feel free to schedule your free strategy session right on our homepage. We’d love to speak with you personally about your specific situation. Thank you so much for listening today. We appreciate it from The Control Your Cash Podcast. We’ll see you next time. 

Olivia: Welcome to the Control Your Cash podcast. Today we’re going to be talking about life insurance, specifically as it relates to how to attract, retain, and reward your key employees. Hi, I’m Olivia Kirk.

Tim: I’m Tim Yurek. We’re from Tier One Capital, and we’re here to show you how to regain control of your money.

Olivia: So tell us a little bit about why executives and why companies and business owners would want to use life insurance instead of investments for attracting and rewarding their key employees.

Tim: Well, there’s a couple of reasons. First and foremost is the fact that built into the life insurance with the death benefit, a company can get a true cost recovery of the benefits and properly structured you can utilize the cash values to help you know, fund a an executive retirement plan or an exit strategy for the owner of the business and then the death benefit, if the company retains the policy, the death benefit can be utilized to cost recover all of the premiums paid and the benefits paid out of that policy.

That’s why you see large corporations, uh, for example, banks. Banks utilize What’s known as BOLI, Bank Owned Life Insurance, and they utilize that to cost recover the cost of their benefit plans, and also to fund their SERPs, Selective Executive Retirement Plans, for their key executives. And again, life insurance creates a nice little cost recovery, but then there’s other benefits.

The second benefit is, if something happens to the executive before they reach the retirement age, you have the death benefit that would kick in, the corporation would get the death benefit and then they could pay the death benefit out as a guarantee of salary continuation for the executive that was deceased.

And I think another big issue is the fact that life insurance, the cash values build up on a tax deferred basis. And what that means is the company doesn’t have to pay tax on the growth inside that policy Until they take it out assuming that cash value is greater than the premiums paid in. So there’s a lot of moving parts so to speak or a lot of little benefits that up that add up to a huge benefit to for a company to utilize life insurance as the funding mechanism for their executive benefits.

Olivia: I got ya. So, you know, in today’s world, as a small business owner, there’s a lot of competition for employees out there. At the end of the day, there’s only one pool of talent, right? And everyone’s competing for the most qualified people out there. So if you’re a small business owner and you have a key employee who’s an asset to the company, it makes sense to want to retain them because the cost of hiring someone could be to 200 percent of what you’re paying your key employee right now.

So setting up these these benefits for the employee and making them attractive to the employee. Because at the end of the day, what one out of every two employees is actively looking for another job out there, at least open to the conversation. Um, it’s important to make sure that you’re competitive with what’s out there in the market.

So you’re not losing that key employee, losing their talent, losing all of that knowledge that they hold within themselves, and then having to start over from scratch at a higher cost. So, um, how do you structure these plans to make it worthwhile for the employee to stay? 

Tim: Well, that’s a good question. And so let’s step back a little further, right?

So during the great resignation, Over 28 million people voluntarily left the workforce. They voluntarily quit their job and they went other places. Maybe places where they were appreciated more. Or maybe they were a place where they were getting executive benefits. So, that’s the first thing. The other thing is, think about this.

At the height of this great resignation, 4 million people every month left their job. And that’s especially troubling for small businesses because small business owners, the, a key employee in a small business, might be the only employee within their geographic region that holds the skill set the company needs.

We had one client, as you know, their, their project manager retired and the company literally did almost everything but stand on their head to get this guy to stay with the company. We’ll let you work, you know, Tuesday, Wednesday, Thursday. We’ll let you, you know, we’ll give you extra time off. We’ll pay you 50 percent more to work 40 percent less.

And the guy said, listen, I’m 65, I’ve worked all my life. My wife and I are in good health. We want to travel. We have plans for retirement. There’s nothing you can do to keep me. Here’s the point. It took three people to replace that guy because of the skill set that he had. And that’s something that more and more businesses are being confronted with on a daily basis.

Now, here’s another thing that has to be considered. A midsize or a large corporation is getting a lot of attention from the benefit planning companies because they have the critical mass to make it worthwhile for those businesses, to put in large benefit packages for their executives or their group of key people.

But a small business might only have one or two key people. So these benefit houses are looking at them and saying, well, you know, it’s not really worth our time to just set up plans for two people when we can go and do basically the same amount of work and set it up for seven or eight people. It’s a lot easier and well, it’s more profitable for them.

So the small business owner is really being underserved in that market, if that makes sense. So to answer your question, how do you set up these plans? Well, it starts with a meeting with the company to see, you know, what their appetite is, or how they’re being affected by what’s going on out in the workforce.

Do they have key people? If they left, what type of impact would that have on their cash flow on their business? You know a lot of times you get a guy who might be a great salesman and he uh, you know is, is doing 60, 80 percent of the company sales, and all of a sudden he decides he wants to start his own business.

Now all of a sudden you’ve just trained your biggest competitor, and oh, by the way, he’s taken all of your key customers and your key accounts. So you gotta look at what can we do to make sure that this guy stays around. And a lot of times I heard one story, um, sort of similar situation. There was a guy who was a key salesman and he learned the business and he went to the company.

He realized that he was 65 percent of the overall sales of the business. And he went to the owners of the company and said, Hey, you know, give me 10 percent equity in the business. All he wanted was 10 percent. They’re like, no, no, no. You know, this is a family business. We’re not. He said, oh, okay. He went out started his own business within a very short period of time, two years, put that company out of business.

You know, I mean, so that was really not a good move.

Olivia: Talk about a worst case scenario. 

Tim: And here’s the point we could have designed a phantom stock plan that would have. Uh, mirrored, yeah, would have mirrored the equity in the business, but it would not have given…

Olivia: Actual stock.

Tim: Actual stock or an equity position. And I bet the guy would have taken that.

He would have, he would have loved that, right? Because now he doesn’t have any of the bad parts of the business. He just has the equity growth. That’s huge.

Olivia: Yeah. 

Tim: So. You know, again, setting up these plans starts with a, a conversation with the business owners. And then, here’s the key point, having that conversation with the executive, finding out what’s important to that individual.

And I’ll give you an example. You know, we worked with a manufacturing company out in Long Island. And we met with the executive. Oh, here’s the other thing. They had, they brought in this consulting firm, big time business consulting firm that did executive benefits from Chicago. So they bring in these hotshots from Chicago who charged them $18,000 to do an analysis that we did for, we would have done for free and they did the analysis and then they came back with a plan that the executives, weren’t interested in because it wasn’t… 

Olivia: It didn’t meet their objective, what they care about.

Tim: Exactly. It didn’t meet their objectives.

Olivia: Hey, do you care if we put this in place for you? Is this going to to make you want to stay with us? You know, is this valuable to you?

Tim: How much value will would do you see in this they saw no value in it?

They went to the company and the company said well that’s gonna cost too much to fund. It just was not from either side whether from the executive or the company it wasn’t a viable plan. So the company now has a bad taste in their mouth. And, you know, we get referred in, we come in and they’re like, you know, sitting there with crossed arms because they’re thinking this ain’t going to work because of their past experience.

So the first thing we said was, listen, we’ll do an analysis. It won’t cost you anything. So that sort of brought their guard down a little bit. But then more importantly, we sat down and found out what the objectives of the company were. Which they wanted to reward the CEO who had been there so long and they wanted to reward him for growing the company.

But then they had that CFO that they needed to do something for. That they wanted to reward him. But now doing it in a way that was beneficial or that was valuable to him. So we sat down, we had the key conversation with him. And then all of a sudden found out that you know, he had an eight year old and a six year old.

He needed to educate them, and he had gotten a late start in life. He hadn’t planned and saved money for them. So we designed a plan that would pay $60,000 per year for each of his children for four years while they were in college. In essence, we paid for their, for his children’s college education. As you know, when we delivered the plan, he was in tears with gratitude. 

Now the point is this, that guy ain’t going anywhere. He’s beholden to that company because that company is going to educate both of his children and it won’t have to come out of his pocketbook.

Olivia: Right, right.

Tim: Right, and and so here’s the deal all he’s got to do is what he’s been doing every day show up go to work. Do everything that he does and do it to the best of his ability. He’s all in on that.

Now, he’s got a greater incentive to look out for the benefits of that company. Why? Because that company is taking care of his, his responsibility, which is to educate his children. So the point is, getting to that valuable point, or understanding what’s important to the executive, as well as what’s important to the company, then our job is easy.

Then we just find a way to make it happen. And the key is there are so many different types of plans out there. We could help people to find the right plan for them. That fits their budget, might be more, you know, balance sheet or income statement friendly, and all of a sudden, now we’re adding value.

Olivia: Right, because although you’re quote unquote paying for, for this benefit, you’re also building an asset that’s on the company’s books. So it’s not, you’re just dishing out all of this money and never seeing it on the balance sheet. You have the benefit. Growing and accumulating within the plan and then also on the back end, you have that cost recovery associated with the death benefit, which is a huge deal for the company because basically of the money that you put into the plan, you’re able to cost recover when that insured passes away.

Tim: Yeah. And again, when you set it up properly, we set it up where the company would get a rate of return, not only get their money back, but get it back at an opportunity cost. So now all of a sudden they’re getting their money back. They’re getting growth on that money and they’re locking in this key person and they’re providing a benefit that is recognized as a huge, massive value for that executive.

Again, that’s the best way to do it. And You know, we’ve, as you know, we do that over and over and over again, but the key is having those key conversations. 

Olivia: Exactly. And then thinking about it from a business perspective, right, once that person dies and you get that death benefit, it infuses into the company, right?

So you could expand the company. You could create another plan for your next key employee that you don’t want to lose. And it kind of creates a momentum within the company because cashflow is the lifeblood to any business. So creating that perpetual motion by insuring these key employees is actually a good thing from a current cashflow perspective.

And then those windfalls coming in down the line as well. 

Tim: Yeah. And think about this. Most companies, you know, there’s a, we have a saying, are you insuring your PCs, right? Your personal computers. More than you’re insuring your VPs. And think about that. Computers don’t make your business what it is. You’re key people.

All of your people make your business what it is. You know, your business is just a building and its equipment. But it’s the people that are operating the equipment. It’s the people that are inside the building. that make your business successful. Doesn’t it make sense to insure them? Because God forbid, if you lose one of them, that’s going to cost you money to try to replace that person.

Olivia: I’m thinking about this from a family, a small family business perspective. Um, this would be extremely beneficial for um, those multi-generational businesses, you know, the younger generation ensuring that older generation while they’re still insurable, while you could still afford that cost, um, on that person would be a huge, a huge incentive, right?

Tim: Yeah

Olivia: A huge relief off that second generation, right? Because, you know, think about the value that that original or older generation holds within the company.

Tim: Right. And you think about, you know, the, the likelihood of a business going to the second generation or the third generation, or even the fourth and fifth generation.

It’s, the odds are insurmountable for a company to get to the fourth generation. But yet we know a lot of businesses locally and nationally that are in the fourth and fifth and sixth generation. That’s where they did the planning. That’s where they had the key conversations to make sure that everything was done properly, to make sure that the business could pass to that next generation in the most tax efficient and most effective way going forward.

Olivia: So when you’re, when we’re thinking about, you know, multi-generational family businesses, how important is that cashflow in making sure that the business is able to go multi-generations? Um, cause you know, when, when the key person dies, when, you know, the first generation passes away, they not only, you not only lose that family member, but you also lose that family member’s mentorship and their knowledge and, and their relationships often could go with them.

Tim: Right.

Olivia: You know, you, you didn’t have those, um, relationships. You didn’t build those relationships as firmly necessarily as that first generation. So, you know, you’re up against a lot. Um, you know, when that first generation passes away and not only that, but maybe the proper planning wasn’t put in place, and you have to buy mom out of the business now.

You know, how are you going to do that when now you’ve lost your relationships, you’ve lost the revenue, um, you’re still figuring out all of the things that that person was doing? Um, the cash flow could make a huge difference in those, those situations. 

Tim: Oh yeah, and then you have another issue. And the other issue is maybe the banking relationships that the business had we’re with the, let’s say the founding generation and all of a sudden the founder dies and the bank doesn’t have the same relationship with that next generation and that next generation doesn’t have the, maybe the talent, maybe it does, but it certainly doesn’t have the relationships and all of a sudden now, you know, uh, a very good banking customer all of a sudden becomes not quite as good.

And now the bank looks at this, are, you know, uh, yeah, we understand you need more money to, you know, an increased credit line and some, some equipment loans, et cetera. We understand you need that money, but, you know, we had a great relationship with your dad. We don’t, we don’t know you, and you don’t have as much of a track record.

And your dad had all the relationships, you know, with, you know… 

Olivia: It all of a sudden becomes riskier for the bank.

Tim: It becomes a riskier proposition for the bank. But here’s the point. What could solve that problem for the next generation? Wouldn’t it be, so the problem is the death of the founding generation.

Wouldn’t the solution be, wouldn’t it be neat if you could have the, the event that triggers the problem, the death of the, of the founding generation? Wouldn’t it be cool to have that same event, the death of that individual trigger the solution to inject the company with cash.? I mean, it’s just efficiency of money.

So now think about what you could do. You can set up a succession plan for the founding generation, an exit strategy, funding these benefits. And then when the founder dies, you get an injection of cash that the second generation or the next generation could utilize to, continue to, to, to operate the business and possibly to grow the business.

It’s all possible. It just becomes an issue of, are you doing the proper planning?

Olivia: Yeah. At the end of the day, the planning is, is going to be the key. Setting up those, those documents with the lawyers, also setting up the plans that are properly funded, that have the proper amount of death benefit to allow these goals to be accomplished.

Because it is possible at the end of the day. But it’s not possible if you don’t do the proper planning. You know?

Tim: Yeah, absolutely. And so oftentimes we’ll see that where companies didn’t do the proper planning or they did the planning and it wasn’t set up properly or it was underfunded or God forbid they used the wrong types of insurance and we see that so often, um, it’s a shame, but it, it happens.

Olivia: With the proper planning anything is possible. Especially when it comes to family business or small business it is important to address these issues, make sure that proper planning is in place so that what you want to have happen is going to happen, even if you’re not there to see it happen. Many times, small business owners and family business owners are putting their heart and soul into this business only to have their years of hard work, dedication, and perseverance demolished at their death.

You know, because at death come, there’s a lot of costs. There’s a lot of things that need to happen at that time that cost money and time. So if you’d like to get started with a plan designed for your family business, your small business to make sure it makes it to that next generation or to make sure that you’re able to exit without bankrupting the business or without closing those doors.

Check out our website at tier1capital.com. Schedule your free strategy session today. We’d be happy to speak with you about your specific situation. Also on our website, we have a free guide. The six critical questions to ask when doing this type of planning. Just click on the button that says business planning guide under our free resources.

Tim: Thanks for listening to the Control Your Cash podcast. I’m Tim Yurek. Until next time.

Olivia: I’m Olivia Kirk. Have a great day. We’ll talk to you soon.

Olivia: Hello and welcome to The Control Your Cash Podcast. Hi, I’m Olivia Kirk. 

Tim: I’m Tim Yurek.

Olivia: And today we’re going to talk about the importance of controlling your cash as a business owner. When it comes to having a family owned business, cash is king. Not necessarily physical cash, but cash accessibility. 

Because let’s face it, whoever controls your cashflow controls your life and more importantly controls your business. I mean most business owners get into their own business to control their destiny. They’re sick of working for the man and they’d rather call the shots and hold their destiny in their own hands. 

Tim: So the key here is having access to cash. And one of the things that I really enjoy about working with business owners is the fact that we can show them how to get one dollar to do multiple jobs. And by that, I mean, you know, maybe they’re setting up plans to fund their succession plan, or they’re setting up plans to attract, retain, and reward some key employees, or they’re trying to set up an exit strategy.

But along the way, if they’re doing this properly, They’re allowed or they’re able to build cash and by having that access to the cash, they can use it to help grow their business. So they’re getting one dollar to do a succession plan or key person retention, but that same dollar is building up cash that they could access and leverage to grow their business.

One dollar, two jobs. And I got to tell you. That works out so swimmingly well for all the business owners that we’ve dealt with. 

Olivia: Exactly. We recently worked with a business owner. We started policies for key employee purposes. Meaning they cross purchased. One owner bought a policy on the other and vice versa to fund a buyout in the event of one of their deaths so they wanted to have that funding available at the death of whichever partner comes first. And they had no plans on accessing that cash whatsoever throughout the life of the policy. But life happens, things change. The economic environment that was there when they started these policies, let’s say five, five years ago, about six years ago.

Yeah. That it was very different back then versus today where inflation is up. Interest rates are up and cashflow in a lot of situations is coming back down because of the squeeze on the consumer. 

Tim: Yeah. And the irony is when we, as Olivia noted, when we, we originally put the plan into effect, we mentioned to them, Hey, you could also borrow against this cash.

And they said, Oh no, we would never do that. So, okay, well, just keep that in mind because it’s certainly an option for you. Well, now fast forward to August of this year. A couple months ago, and we get a call and, Hey, how much cash is in those policies? And we told them and they said, uh, We need a loan. I said, Oh, okay.

What, what changed? You said you weren’t going to borrow. He goes, well, we bought a truck in July. We did it like we always did. We borrowed against our, on our credit line. And we got our first interest statement and it was 9.5%. How much does it cost to borrow against those life insurance policies?

Well, it was 5.35%. He said, well, we’ll take that loan. But here’s the point because they built up this pile of money Now they have the option to use it. And that’s where the freedom comes in. So in their mind They’re looking at it like okay 5 and 5.35 is lower than 9.5 and I get that part of it, but…

Olivia: That’s just the beginning.

Tim: That’s just the beginning. So he calls me and says, Hey, how do I start paying this loan back? I said, well…

Olivia: Do you want to? 

Tim: When, when do you want to? He goes, What do you mean, when do I want to? I said, Whenever you want to start. This is an unstructured loan. So that means, you decide when, and actually if, you pay the loan back and then you also decide how much and oh, by the way, if you commit to a certain monthly figure and you find out that cashflow is not as good as in the previous months as it is now, you can stop it or reduce it.

And that’s when it’s the light bulb went on for him and he’s like, Whoa, we are in control here, aren’t we? And that’s the point. You know, financing in and of itself isn’t bad as long as you’re in control of the process. And that’s the thing that I think the value that we can bring by utilizing plans that are set up for different purposes.

But now we can leverage the cash, and that provides the freedom.

Olivia: Yeah, exactly. And think about it. By borrowing against the life insurance policy, through these policy loans that are contractually guaranteed in these contracts, it doesn’t impact the net worth of the business. Meaning, whether they pay cash, financed traditionally or financed through a policy loan, the piles of cash are still the same.

They still have the asset worth X amount of dollars and they still have a decrease in cash, a loan from a bank, or a lien against that life insurance policy loan. And let’s just take a step back here and talk about the benefits of borrowing against a life insurance policy. First of all, it’s contractually guaranteed as long as they have cash in that policy, they’re able to access it on a guaranteed basis.

Because the way life insurance policy loans work is unique. In that the life insurance company is actually giving the policy owner a loan from the general account of the life insurance company, not the life insurance policy. The life insurance company then places a lien against the policy owner’s cash value.

Meaning after you borrow, let’s say $150,000, you don’t have access to that $150,000 until it’s repaid. And they charge you interest. So when you’re paying back that loan interest, it’s going towards the insurance company’s profits for the year. But when you use a mutually owned life insurance company, the owners of the company who are going to benefit from the profits that the insurance company makes are actually the policy owners.

So when the life insurance company is making that profit, it goes to the dividends. It’s passed along to the policy owners in the form of tax free dividends. Meaning when the insurance company does well, the policy owner does well. Additionally, with a non-direct recognition company, the performance of that policy isn’t going to be impacted when you take a policy loan, meaning your dividends, your growth within your policy is going to be exactly the same, whether or not there’s a loan against that policy.

The only consideration that needs to be taken into account. Is that loan interest, that’s the only cost that the policy owner is incurring on this loan. 

Tim: Yeah, and I think the thing that people miss or the point that a lot of folks miss is the fact that we finance everything we buy. So whether you finance through a bank or you finance through a life insurance company or you pay cash. Every one of those choices has a cost.

And it just, it really becomes an issue of where are you giving up the least amount of money. And I have yet to see a situation where people were not better off borrowing against their life insurance versus any other form of finance. 

Olivia: Exactly. 

Tim: And, and, and that’s, that’s purely from a numbers perspective.

But, the hidden value when you’re borrowing against a life insurance company is the fact that you’re in control. You’re in control of the repayment process. You’re in control of the borrowing process. You’re in control of everything. And because of that, that’s the key for business owners. Most business owners, again, started their business because they want to control their own destiny.

But yet the bank owns them. Now, when we can cut the bank out and put them in control. Oh, my God. That’s a game changer. 

Olivia: Exactly. 

Olivia: I mean, how many business owners have we worked with where, by simply extending the amortization schedule of their existing loans and stop, you know, giving away every single dollar we make to the bank.

Think about the impact that would have on your business if, let’s say, you were able to cut your monthly obligations in half. And instead put that other fifty percent towards an asset that you own and control and could still leverage against without impacting the growth on that asset. 

Tim: Yeah. And that’s a really neat technique.

So a lot of times what we’ll do is we’ll actually do that. We’ll extend the amortization schedule to free up cashflow and use the cashflow to fund a succession plan or a key person retention plan or an exit strategy. And now again, we have that money building up. Now we can utilize that money to ultimately go back and pay off that loan.

So now instead of taking, let’s say half of the loan and using that to build an asset, now you’re taking a hundred percent of the loan monthly loan payment and using that to build up and replenish what you borrowed and that really, again, puts the business in a much stronger position. And let’s face it, you know, the way things are shaking out, businesses are being squeezed from so many different directions.

Interest rates are up. Inflation is up. There’s turnover over on their, their workforce. You know, the great resignation. That’s a thing. That’s, you know, four million people every month left their jobs. 

Olivia: Willingly. 

Tim: Willingly. And then, again, now, just to underscore, businesses are dealing with the twin challenges of high interest rates and high inflation.

It costs more for inventory and supplies. It costs more to hire new people. And It’s costing more to borrow to capitalize your business, but boy, isn’t it great if you can be in control of that borrowing process? That, that’s just a game changer. 

Olivia: Yeah, and we say it all the time, whoever controls your cash flow controls your life.

And with our client who recently took that loan to finance the truck, they’re going to wait until their busy season when their cash flow is flush. To knock down that policy loan and the key difference between traditional financing and financing with the policy loan is once they start chunking away at that policy loan. They’re gonna have access to that hundred and fifty thousand dollars that they borrowed again, so that when the next thing comes up, they’re able to rinse and repeat they’re able to finance again using those same dollars.

Tim: Yeah, and, and that’s, that’s key because every payment you make on the loan reduces the outstanding loan balance, but increases the amount of equity you’re eligible to take next month.

Olivia: Exactly. 

Tim: Or whenever, whenever that time period is, you know, whenever you want to take another loan, you know, and that was another thing that he had asked me, he said, well, Is there any limit to how many loans I could take? No, you could take a loan every month as long as there’s, or every day. As long as there’s equity to borrow against, you have the, the contractual right to borrow it.

Olivia: Exactly. And that’s, that’s, I mean, what more could you ask for as a business owner? Access to cash when you need it, plus, you’re able to accomplish other planning goals, whether it be business succession, key person planning, employee retention. Or any of the other things that we deal with that we have to deal with as business owners.

And that are a lot of times avoided because of the complexities of this type of planning. And not only that, but the cashflow that goes into this planning, you know, there’s a price tag to solving these problems, but by looking at the business overall, looking at the cashflow, looking at the debt, seeing where we’re able to free up the cashflow, you’re able to keep the cashflow the same.

Or close to the same, have minimal impact on it, because whoever controls the cash controls your life, you need cash flow, it’s the lifeblood of any business. So we want to make sure that we’re achieving these goals without pinching the cash flow, because at the end of the day, you need the cash flow, you know, and you need to accomplish these planning goals, because the longer you push it off, a lot of times the more expensive it becomes. 

Tim: You know, and one of the other things that, You know, MetLife did a survey and found that over sixty percent of business owners think that a recession is right around the corner. And if that’s the case, having access to cash is going to be the key because the first thing that’s going to dry up and it’s the first thing that dried up during the 2008 financial crisis was access to capital.

That’s when banks started calling in their credit lines and, uh, whether it was a home equity line or a business line, they closed out those lines. Now, just when things are getting tough and you need to access money more than ever, now the bank is pulling the rug out from underneath you. You know, there’s a saying that a banker is somebody that’ll sell you an umbrella when it’s sunny and take it back when it starts to rain. 

Olivia: That’s the perfect example of that. And, and as the business owner, you have to think about it from the consumer’s perspective as well, because interest rates increasing, inflation increasing, and a lot of the employees, most of the employees out there aren’t increasing their income to keep up with these increasing costs. We see that in the increase in consumer debt that’s going up quarter after quarter and is actually at an all time high all across America. They’re not decreasing their, their lifestyle. They’re not able to, in a lot of cases, they’re keeping up with their lifestyle, but the cost of that lifestyle is increasing month after month after month.

Even if the Fed is saying that, you know, inflation is at 2%, they’re not counting the things that really matter that are actually impacting us as Americans. And that’s going to be felt by the consumer as well as the business owner. 

Tim: Yeah, everything is going to certainly pass down to the consumer, right? So when the things dry up for the consumer, they start buying less.

And when they stop buying less, that affects the business. So again, having access to cash. Not only can position you to be in control, but also can position you to not be a victim of a recession, and actually put you in a position to take advantage of the recession, where now if you have access to cash, maybe you can go and buy somebody, buy some inventory from a competitor who’s going out of business.

And guess what? You’re going to buy that inventory for pennies on the dollar.

Olivia: Yeah, yeah. I mean, I, I believe more millionaires are made during recessions than any other time. And it’s not for lack of preparation. Those who have cash are going to be able to take advantage of the opportunities when they arise.

When the stuff hits the fan instead of being a victim of this recession. And the key is to have access to cash, to be in the position where you’re able to take advantage of the opportunities rather than being a victim of the external world.

Tim: Yeah. And that just, you know, being in control, having access to capital puts you in control.

And when you’re in control. Now, you’re in a position where you can start taking advantage of opportunities, and boy, there is no small price tag you could put on the freedom that that creates.

Olivia: Exactly. If you’re a business owner and you’re worried about the recession and you’re ready to become an opportunist in this next recession instead of a victim of it.

Be sure to check out our website at tier1capital.com to schedule your free strategy session today. We’d be happy to go over your specific situation and talk about how to position you to take advantage.

Tim: Thanks for joining us. We look forward to seeing you again.