Milking a Business for Retirement

New strategies designed to help small-business owners save for retirement or pass down their companies to heirs can make sense for some people but also carry risks.

Many retirement-plan options presently exist for small businesses to administer, but generally require that owners provide the same benefits to other employees, making them expensive — and they work best if the investment returns have decades to compound.

One alternative to these existing retirement-plan options is to sell the business's assets to the kids using what is called a "sale to a grantor trust." The strategy takes advantage of a limited-time offer: Under the Tax Relief Act of 2010, the federal gift-tax exemption increases to $5 million from $1 million for individuals through 2012, after which the exemption is scheduled to revert to $1 million.

Another strategy is to borrow against the business to fund an annuity. This strategy charges borrowers interest in the 5% to 6% range, along with an origination fee of 1%, up to $15,000. Borrowers then invest in an array of "equity-indexed annuities," which offer the promise of protection from stock-market losses or "permanent" life-insurance policies, which combine an insurance policy with an investment portfolio. The loans are structured so that the business makes interest-only payments each year. At the end of the loan's term, typically at least five to 10 years, the business owner ideally would have earnings to fund retirement or, in some cases, college bills for children.

To read more about these strategies for small-business owners, visit WSJ.