Advanced Underwriting Consultants

What Every Planner Needs to Know About Employee Stock Ownership Plans (ESOPs)

Owners of closely held businesses face challenges when seeking to transfer their companies to successor ownership. In some cases, the business owner has trouble identifying the next owner. In others, planning to fund the transfer at the key moment is a problem.

An employee stock ownership plan (ESOP) is a special kind of defined contribution retirement plan that can help closely-held business owners solve succession issues. Where it fits, an ESOP offers substantial advantages over traditional buy-sell planning. The main advantage is that the business owners and the company are able to fund a buyout with pre-tax money.

Because an ESOP is a retirement plan, the rules that apply to other qualified plans apply to it.

o All eligible employees must be included.
o The plan cannot discriminate in favor of certain employees.
o Related businesses must be aggregated together.
o A plan document must be implemented and kept up-to-date.
o Other strict administrative requirements must be observed.

Most closely held business owners, if they are considering an ESOP, would need to have several questions answered:

1. If all employees must be included in an ESOP, how can it be used effectively to transfer the business to the right group?
2. How can the business owner use the ESOP to buy his business interest?
3. What tax advantages are available to the business and its owners?
4. What if the business owner is not ready to turn over control of the business right away?
5. What special steps need to be taken to effectively implement an ESOP?
6. How does an ESOP integrate with the rest of the business owner’s financial and estate plans?

Those who present ESOPs to closely held business owners will also want to understand the role life insurance plays in the process.

For more information on ESOPs, please contact Kelly Finnell, J.D., CLU, and Benjamin Buffington of Executive Financial Services, Inc., in Memphis, Tennessee (

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