Kelm Financial Services – Example Case – Architectural Firm

(Note: Names have been changed to protect confidentiality)

Background: ABC Architectural Designs, Inc. was founded in 1991. Several years later the founder brought on two other architects who then become partners. The firm was very successful and grew rapidly. At the time that they were referred to Kelm Financial Services, the firm had seen a five year average annual revenue growth of 16% and an average net profit of over $300K (after all expenses including salaries to the three partners). The company had grown to a total of 33 employees including five (5) non-owner “key employees”. The business was valued at approximately $3M.

Ownership Structure and Partner Salaries: The firm was organized as an S-Corp and taxed as a partnership. The company was owned by three (3) partners

  1. Bob, age 68, owned 40% of the company and drew an annual salary of $ 320K
  2. Steve, age 54, owned 35% of the company and drew an annual salary of $240K
  3. Ben, age 48, owned 25% of the company and drew an annual salary of $180K

Key Employees and Salaries: The partners had identified five (5) key employees that were critical to the growth and operation of the company

  • Four (4) architects, ranging in salary from $80K to $110K.
  • An Office Manager with a salary of $70K.

Needs Analysis: In a meeting with Kelm Financial Services, the partners expressed concerns in the following areas.

  • How can the partners retire or otherwise exit the business? Bob, age 68, wanted to retire in the next 5-7 years.
  • How can the business be protected if a partner or a key employee dies or becomes disabled?
  • The company’s 401(k) has a low participation rate and company 401(k) match dollars are being wasted on high turnover field employees. What other options are available?
  • What can be done to help retain key employees, particularly those five key employees – four architects and one management person?
  • How can the company share a portion of the profits with the five key employees without changing the ownership structure of the company?

A Three Part Solution: Kelm Financial Services proposed several solutions to meet the needs of the company:

  1. Funded Buy Sell Agreement. Structured financial products were used to fund a buy sell agreement between the three partners.
  2. Executive Bonus / Profit Sharing. A plan was developed to distribute the profits of the company to the partners and the five key employees.
  3. Key Person Insurance. As part of the Executive Bonus plan, the company was insured against the death of a key employee.

Each of these three elements is described in more detail below.

Funded Buy Sell Agreement

The buy sell agreement between the partners was updated and funded with structured life insurance and annuity products.

Buyout Amounts

The buyout value was calculated by multiplying each partner’s ownership share by the current value of the company as determined by an independent valuation. For example, Bob’s buyout amount would be 40% of $3M which equals $1.2M.

  • In the event of a partner’s death, the partner’s wife would receive the buyout amount.
  • In the event that a partner wanted to retire and exit the company, the buy sell agreement provided for the company to buy out his share over a 10 year period. To provide the buyout funding, the company maintained $350K in mutual funds invested in short term bonds.
  • In either the case of death or retirement, the remaining two partners would own the entire company.

Funding Vehicle

Guaranteed Universal Life (GUL) contracts were used as the funding vehicle. The amount of each contract was based on the buyout amount for that partner.


The company purchased and maintained ownership of the life insurance contracts. The company was also the beneficiary of the policy, providing funds for the company to buy out the widow of the deceased partner.

Executive Bonus / Profit Sharing

An executive bonus / profit sharing program was designed and implemented to accomplish the partner’s objectives.


The plan was designed to accomplish the following objectives.

  • Provide a mechanism to distribute excess profits to the partners and key employees
  • Serve as a tax advantaged supplemental retirement plan for partners and key employees

Funding Amounts

The plans were funded as follows

Profitability – All funding was contingent upon the company being profitable.
Partners – For partners, the funding amount was up to 15% of their salary
Key Employees – For key employees, the funding amount was up to 10% of their salary.

Vesting Schedule

Often referred to as “golden handcuffs”, a vesting schedule was designed to create the incentive for key employees to stay with the company.

Partners were immediately vested
Key employees were vested at a rate of 12.5% per year and were fully vested after eight (8) years.

Funding Vehicles

The funding vehicles were selected and designed to provide maximum benefits and accomplish the desired objectives.

Desired Benefits

  • Accumulate cash value as rapidly as possible
  • Provide tax free growth during the accumulation phase
  • Provide tax free access to the accumulated value
  • Provide tax free retirement income
  • Provide a minimum guaranteed annual return
  • Provide upside potential if the stock market goes up
  • Provide flexibility if needs change

Indexed Universal Life (IUL)

Based on the benefits provided, IUL contacts were selected as the preferred funding vehicle.

  • IUL contracts were used on two of the partners and all five (5) of the key employees.

Indexed Annuity

Indexed Annuity contracts were used as the funding vehicle for the oldest partner, Bob.

  • The indexed annuity was selected since it better facilitated Bob’s retirement in the near future.

Key Person Insurance

A “split beneficiary” was used on each of the key person contracts. In the event of the death of a key employee, $100K of the death benefit would go to company to offset the cost of replacing the employee. The remaining death benefit was paid to the employee’s beneficiary.