Blog #156: Good News / Bad News Executive Benefit Plan™ (Part 1 of 2)

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In Blog #154, we examined the use of a personally-owned Indexed Universal Life (“IUL”) policy as an alternative to a deferred Profit Sharing Plan (“PSP”) for Jennifer Hunt, president of Midland Oil Supply, Inc., an S corporation family business.  Jennifer is in a 40% income tax bracket counting the pass-through of the company’s taxable income.

Alan Westbrook, age 45, is Senior Vice President, Sales, and is a serious rainmaker.  He is not a stockholder, and Jennifer wants to provide him a significant retirement plan in order to ensure he stays with the firm.

Let’s examine “old reliable”, the Executive Bonus Plan — with a couple of new twists.

Bonuses

$100,000 —  Company’s Annual Bonus to Alan in Years 1 - 5
$  60,000 —  Company’s After Tax Cost of Annual Bonus1
$  65,000 —  Alan’s After Tax Bonus in Years 1 - 52
$  65,000 —  Alan’s IUL premium in Years 1 - 5
$           0 —  Alan’s Out-of-Pocket Cost in Years 1 - 5

1Jennifer’s 40% bracket       2Alan’s 35% bracket    

Image #1

blog-156-image-1-bonus-employers-costs-excutives-cost-graph

This plan also includes a “claw-back” provision if Alan voluntarily terminates employment during the first five years or if he is terminated for cause during that period.  If Alan dies during the term of the claw-back, the repayment obligation is waived.

Note:  Specimen implementation documents for this plan are available below.

The repayment obligation looks like this:

Image #2

blog-156-image-2-specimen-implementation-documents-repayment-obligation

The percentage claw-back shown in Column (3) is arbitrary, and it can be any percentage desired by the business owner.  I illustrated 60% in this example, and the first five years in Column (6) illustrate pretty severe “bad news”, but the relief in the beginning of year 6 is surely “good news” when the claw-back is eliminated.  Alan is then fully vested in the policy’s growing cash value which is scheduled to produce annual, after tax, retirement cash flow of $75,000 a year starting at age 65 — all with no out-of-pocket cost for Alan if he remains employed for at least five years.

Below is a graphic of the overall plan:

Good News / Bad News Executive Bonus Plan
(Five Years of Funding)
Image #3

blog-156-image-3-Good-News-Bad-News-Executive-Bonus-Plan-Five-Years-of-Funding

Click here to see the full illustration from the Executive Security Plan module in the InsMark Illustration System.

Click here to review the tax consequences of the executive repaying any of the bonuses and the employer receiving such repayment.  (This report is also available in the illustration module.)

Would Alan accept such a plan, and what would it indicate to his employer if he refused it?  Probably that Alan is likely thinking of seeking other employment.  What a terrific management tool this turns out to be — either way:

  • It offers a benefit to a key non-shareholder executive that provides an important incentive to stay with the firm for at least five years;
  • If the executive declines to participate, it can also uncover someone who is likely considering different employment.

In some ways, this bonus plan performs like a loan-based split dollar plan except, unlike loan-based split dollar, the bonus plan is deductible by the employer.  The fact that it is not a loan-based plan means that provisions of Sarbanes Oxley do not prohibit its use for senior executives of public corporations.  Click here to review a report entitled “Controlled Bonus Plan vs. Split Dollar Plan”.

Note:  We will analyze a loan-based split dollar alternative for Alan in Blog #157.

Why Only Five Years of Funding for the Bonus Plan?

Let’s assume that Alan is so valuable to the company that there is a serious incentive to retain him for longer than five years.  Below are details of a change in plan design that doubles the bonus in years 6 through 10.

Extended Bonuses

$200,000 —  Additional Bonus to Alan in Years 6 - 10
$120,000 —  After Tax Cost of Additional Bonus (40% bracket)
$130,000 —  After Tax Extended Bonus to Alan (35% bracket)
$130,000 —  Alan’s IUL premium in Years 6 - 10
$           0 —  Alan’s Out-of-Pocket Cost

Image #4

blog-156-image-4-extended-bonus-employers-costs-excutives-cost-graph

This revised plan also includes a “claw-back” provision if Alan voluntarily terminates employment during the first ten years.  See below for the new claw-back — note the reduced schedule in years 6 - 10 in Column (3).

Image #5

blog-156-image-5-bonus-to-excutive-annual-after-tax-retirement-benefits-graph

At the beginning of year 11, Alan has full vesting of some serious seven-figure cash values which are scheduled to produce annual, after tax, retirement benefits of $235,000 a year starting at age 65 totaling over $7 million for the years illustrated — all with no out-of-pocket cost for Alan if he remains employed for at least ten years.

Below is a graphic of the revised plan:

Good News / Bad News Executive Bonus Plan
(Ten Years of Funding)
Image #6

blog-156-image-6-Good-News-Bad-News-Executive-Bonus-Plan-Ten-Years-of-Funding

Click here to review this revised Executive Bonus Plan.

Note:  Controlled Bonus Plans typically include an Endorsement of Policy Ownership Rights (“Endorsement”) which restricts the executive from accessing policy values prior to retirement.  The Endorsement takes the form of an Agreement between the business and the executive in which the executive agrees to this condition.  The Endorsements are registered with the issuing insurance company and, as a result, the executive is unable to take any action on the policy other than that allowed by the Endorsement.

In the event of an Executive’s death prior to retirement, the Endorsement allows the immediate payment of the death proceeds to the Executive’s family.

Owner-executives frequently use a bonus approach for their own plans; however, they never use a claw-back or Endorsement technique.  This is because owners do not want to impose voluntary restrictions on the funds in their own plans.  While owners may well be willing to provide bonus funding for valuable non-owner executives, they do not want to see cash values easily squandered by such executives in pre-retirement years or, worse, used for competitive ventures, thus the Endorsement.

Conclusion

One sure way to ramp up activity regarding executive benefits is to ask business owners this question:

“Do you have any non-owner executives who are so valuable to your business that you want to do whatever is economically feasible to induce them to stay with you?”

If the answer is “Yes,” say:

“Retirement planning concerns are on the minds of most -- maybe all -- of your executives.  I’d like to show you a selective, cost-efficient way your company can provide a serious retirement enhancement to important executives.  Would you like to see how it works?”

If you do this, you should get many favorable responses.

Plan Documentation

Documents On A Disk imageSpecial plan documentation is required to support this benefit plan.  InsMark’s Cloud-Based Documents On A Disk™ (“DOD”) has a comprehensive set of specimen documents for the Controlled Executive Bonus Plan in the Key Employee Benefit Plan section of documents.  If you are not licensed for DOD and would like more information, go to www.documentsonadisk.com.  Those licensed for DOD can access DOD and that document set by signing in at www.insmark.com.

 

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Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

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Click here for the Guide to Digital Workbook File for Blog #156 that summarizes its contents of the Workbook.

 

Licensing InsMark Systems

To license any of the InsMark software products, visit our Product Center online or contact Julie Nayeri at Julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President — Sales, at dag@insmark.com or (925) 543-0513.

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InsMark’s Referral Resources
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We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

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Testimonials

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Gary Sipos, M.B.A., A.I.F.® InsMark Platinum Power Producer®, Sipos Insurance Services, Freehold, NJ

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David McKnight, Author of The Power of Zero, InsMark Gold Power Producer®, Grafton, WI

“The reason I use InsMark products is because they are so good at explaining financial concepts to all three parties: 1) the producer trying to explain the idea; 2) the computer technician trying to illustrate it; 3) the customer trying to understand it.”
Rich Linsday, CLU, AEP, ChFC, InsMark Power Producer®, Top of the Table, International Forum, Pasadena, CA

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

“InsMark” is a registered trademark of InsMark, Inc.
“Documents On A Disk” is a trademark of InsMark, Inc.
“Good News / Bad News Benefit Plan” is a trademark of InsMark, Inc.

 

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More Recent Blogs:

Blog #155: Marketing Magnification (Using Online Video)

Blog #154: Smart Alternatives to Traditional Retirement Plans (Part 4 of 5)

Blog #153: Smart Alternatives to Traditional Retirement Plans (Part 3 of 5)

Blog #152: Smart Alternatives to Traditional Retirement Plans (Part 2 of 5)

Blog #151: The Trump Presidency: How It Will Impact the Sale of Life Insurance Retirement Plans

 

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Blog #136: Taking Care of a Rainmaker

IUL – An Alternative to Stock Options

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Assuming there are sufficient profits, almost all forward-thinking companies reward important key executives with special benefits, e.g., bonus plans, split dollar, salary continuation, stock options, etc.

If executives are valuable enough to be provided with a significant fringe benefit, they should also be covered with a business-owned key executive policy to indemnify the business against losses created by their death.  There is a very efficient way to accomplish both issues.

Executive Trifecta®

“Trifecta” refers to a winning sequence of three and is typically associated with a pari-mutuel bet in horse racing that involves picking the exact order of which horses will finish first, second, and third in a given race.

We have given the name Executive Trifecta to the trifecta of benefits described in this Blog, and this plan can be illustrated in the InsMark Illustration System (located on the Executive Benefits tab).

Executive Trifecta is highly suitable for non-owner key executives of any business (profit-making or tax exempt), but it is also effective for principals of C Corporations, S Corporations, LLCs, LLPs, and Partnerships.  It may surprise you that it works better for principals of an S Corporation and even better for principals of an LLC, LLP or Partnership.  (More on this appears below.)

The Case Study that follows examines how Executive Trifecta can work for an important executive of an S Corporation who has no ownership interests in the company.

Case Study

Tony Jamison is Executive Vice President and General Manager of Town and Country Auto Group, Inc., a multi-brand, multi-city, new car dealership operating as an S Corporation.  Tony is a classic rainmaker of corporate revenue for Town and Country Auto, and the company is vitally interested in providing him with an irresistible executive benefit that will ensure his employment for at least the next 10 years.

“Trifecta” refers to a winning sequence of three -- and Executive Trifecta delivers three, very powerful, sequential benefits.  Here is how it works:

  • Selected key executives are insured in favor of the employer;
  • In pre-retirement years, a portion of each policy’s death benefit is allocated to provide survivor income benefits to the insured executive’s family;
  • At a designated age, ownership of the life insurance policy is contractually transferred to the executive (as a deferred bonus) thereby creating a supplemental retirement asset.

Key Executive Coverage

With Executive Trifecta, the face amount of the life insurance policy is established using either of the following two options:

Option 1: The employer makes an arbitrary decision as to the amount, or;

Option 2: The software calculates the appropriate amount using employer estimates as to:

  • The loss of revenue for the time it takes a replacement executive to match the performance of the current executive;
  • The expected compensation differences between the current and replacement executive;
  • Other replacement costs such as signing bonus, relocation package.

I used Option 1 in the following analysis in this Blog to establish coverage of $2,500,000 to be retained by Town and Country Auto Group (the Plan Sponsor) to indemnify it against the loss of Tony due to his death.  (See Blog #44 for an example of Option 2 where the executive is a non-owner of a Limited Liability Company.)

Survivor Income Benefit

The software has a “smart solve” Survivor Income Benefit Calculator which establishes the amount of coverage needed to fund the Plan Sponsor’s payments to Tony’s family.  In this Case Study, we illustrated a benefit of $300,000 a year for 10 years which included a 3.00% cost of living adjustment as hedge against inflation.  The Survivor Income Benefit Calculator indicated that $1,753,806 of coverage is needed to fund the present value of the employer’s after tax cost of this survivor benefit.  Tony’s family will receive income paid over 10 years totaling $3,439,164 should his death occur any time in the next 10 years.

This produces a policy death benefit of $4,253,806 -- the combination of the death benefit to be retained by the Plan Sponsor ($2,500,000) and the amount needed to fund the present value of the survivor income benefit ($1,753,806).

Policy Transfer - beginning of year 11
(Policy values are effectively the same as the end of year 10)

In our example, we scheduled the transfer of the policy to the executive at the beginning of year 11 at which time all policy values (accumulation values of $877,189 and death benefits of $4,253,806) become personally owned by Tony.  He owes income tax on the $877,189 which, in his 40% income tax bracket, costs him $350,875.  This is offset by a bonus from the Plan Sponsor of $350,875 requiring an out-of-pocket cost to Tony of $140,350 (40% of $350,875).

Note:  This is just one of many bonus options.  For example, a gross-up bonus (also known as a “double bonus”) could be used to offset all Tony’s costs for the transfer.

Below is the financial summary of what Town and Country Auto Group is providing Tony in exchange for his loyal employment over the next 10 years:

  • Almost $3,500,000 of survivor income benefits for his family if he dies anytime during the next 10 years;
  • Beginning in year 11, a personal life insurance policy with no further premiums due with a face amount of $4,253,806 and current cash values approaching $1,000,000;
  • After tax retirement cash flow of $260,000 a year that totals more than $9,000,000;
  • Long-range residual cash value of almost $2,500,000.

Tony’s cost for all this is $140,350 of income tax in year 11, and that tax could easily be funded by Tony using a participating loan on the policy after the transfer.

This transaction is a contractually guaranteed option to acquire a seasoned IUL policy, and I suspect you now understand why I sub-titled this Blog:

IUL – An Alternative to Stock Options

For a variety of reasons, many family-owned companies are unwilling to use classic stock options - not the least of which is a reluctance to deal with non-family, minority stockholders once the options are exercised.

Below is a graphic of the plan’s costs and benefits from Tony’s age 40 to 100:

Image 1
Summary of Costs and Benefits

blog-136-img-1-summary-of-costs-and-benefits

Details of the Plan

Click here to review Tony’s numbers on Page 1.  Note on Page 3 that he would need to earn a pre-tax rate of return in excess of 30.00% on his $140,350 cost in year 11 in order to match his results of the plan (and this ignores the value of the survivor income benefits in years 1-10 as well as the policy death benefit for his survivors thereafter).

Below is a graphic of Tony’s results:

Image 2
Trend Lines of Tony’s Costs and Benefits

blog-136-img-2-trend-lines-of-tonys-costs-and-benefits

Click here to review the costs and values for Town and Country Auto Group. Over 10 years, it costs this Plan Sponsor $700,000 in policy premiums offset by substantial cash values.  (At the end of 10 years cash values total $857,031, a gain of $157,031 over premiums paid.)  At the beginning of year 11, these values are transferred to Tony resulting in a small after tax gain to the Auto Group.  (See the Details of the Tax Consequences report down a few lines.)

Click here to review the funding for the survivor income benefits.  There is no additional cost to Town and Country Auto Group to provide this benefit as $1,753,806 of the policy death benefit is reserved for this purpose (see year 1, Column 3).  $1,753,806 is the present value at 6.00% of the after tax cost of providing the stream of survivor benefits shown in Column 1.

Click here to confirm “Details of the Tax Consequences” to both the Plan Sponsor and Tony that are associated with the transfer of the policy at the beginning of year 11 (reflecting end of year 10 values).  The income tax savings of $280,000 to the Plan Sponsor caused by the transfer of the policy to Tony are reduced by the $210,526 after tax cost of the bonus paid to Tony to assist with his tax cost of the transfer resulting in a gain of $69,474 which reduces the Plan Sponsor’s funding to $630,526 ($700,000 minus $69,474).  Click here to review those calculations.

It is unusual for me to show you pieces of the overall illustration one at a time.  I have done so because Executive Trifecta can appear very complex the first time you look at it, and I wanted to give you a preliminary heads-up before you review it in its entirety.

Click here to review all the reports associated with this benefit plan.  Executive Trifecta has a composite feature where costs and benefits for several executives can be illustrated.  While you generally would not produce a composite for just one executive, I included the composite with this case because the summary numbers on illustration Pages 2, 3, 4, and 5 are so powerful - and probably welcome as this simplifies the moving parts of this benefit plan.

The detailed illustrations for Tony’s plan begin on illustration Page 10.  A Flow chart of the Executive Trifecta process is on illustration Page 11.  It may look complicated, but study it carefully as it will help guide you through the reports that follow.

A Benefit Summary -- sort of a road map -- appears on illustration Page 12 where highlights of each feature are listed along with the name of the specific report that illustrates each one.  Special thanks to Kerry Walker, InsMark Platinum Power Producer, for not only suggesting the Benefit Summary but also helping us design it.

Conclusion

Is the plan worthwhile for Tony?  This is easy -- absolutely yes!

Is the plan worthwhile for Town and Country Auto Group?  Assuming Tony’s high value to the company over the next ten years -- absolutely yes!

What if Tony is not interested in participating in the plan?  Some serious management information will have been discovered as Tony may be considering alternate employment.  Any advance notice of it - or even a suspicion of it - is a valuable management tool.

Repeat the Benefit Plan in Year 11?

What happens after ten years?  All Tony’s benefits are vested after ten years, so after that he can depart without penalty.  Can the Auto Group convince him to stay longer?  They likely can by duplicating the benefit plan over the following ten years!

Advantages of Executive Trifecta over Loan-Based Split Dollar:

  • No Applicable Federal Rates apply;
  • No compliance with split dollar regulations required;
  • No liability for the executive in the early years of the policy due to surrender charges;
  • No IRS issues with bonuses;
  • The plan is suitable for executives of a public business (i.e., no conflict with Sarbanes-Oxley as is the case with Loan-Based Split Dollar).

Business Types

The tax details are different depending on whether the executive is an owner or non-owner -- as well as whether the firm is a C Corporation, S Corporation, LLC, or Partnership.  The Sample Illustrations section for Executive Trifecta in the InsMark Illustration System contains illustrations for all these business entities.  You will be amazed at the efficiency of plans for owner-executives of S Corporation, LLCs, and Partnerships.  The transfer tax costs are significantly reduced for owners of S Corporations and are totally eliminated for owners of LLCs and Partnerships.  Executive Trifecta is one of the few benefit plans for pass-through entities with more leverage for owners than non-owners.  (We can also illustrate plans for executives of tax exempt organizations.)

Click here for remarks about Executive Trifecta and Section 409A.

Click here for Tax Notes detailing the income tax consequences of any of the referenced business types.

Click here for a comprehensive PowerPoint presentation with examples of all variations of Executive Trifecta for different business types and their executives.

Documentation

dod InsMark’s Cloud-Based Documents On A Disk™ has specimen documents for implementing Executive Trifecta located in both the Business Owner Benefit Plans and Key Employee Benefit Plans section of documents.  (Note: This link will take you to the DOD promo site.  If you are licensed for DOD, go to www.insmark.com and select My InsMark from the home page for access to the full version of DOD.)

Licensing InsMark Systems

To license the InsMark Illustration System, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President - Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog136.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“My experience with InsMark’s Executive Trifecta is career changing.  Showing this idea to a business owner is a win-win-win!  The business owner wins by protecting and retaining one of his most valuable assets (a key executive).  The executive wins by being recognized and rewarded for efforts, results, and loyalty.  The financial professional wins by gaining the confidence and business of a new client.  This concept can revolutionize a financial services career.”
Kerry L. Walker CLU, ChFC, InsMark Platinum Power Producer®, The Walker Firm, Inc., Aurora, CO

“InsMark is the Picasso of the financial services world — their marketing savvy never fails to amaze me.”
Doug Peete, Past President, Top of the Table, InsMark Silver Power Producer®, Overland Park, KS

 

Important Note #1:  The hypothetical values associated with this Blog assume the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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More Recent Blogs:

Blog #135: Merging College and Retirement Planning

Blog #134: Best Strategy for an IRA (Part 2 of 2)

Blog #133: Best Strategy for an IRA (Part 1 of 2)

Blog #132: The Calculation Magic of Wealthy and Wise®

Blog #131: Don’t Burn the Nest Egg™

 

3 Reasons Why It’s Profitable For You To Share These
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Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive

 

Blog #127: Leveraged Executive Bonus Plan with
Bank-Funding of the Income Tax (Part 1 of 3)

(Updated March 7, 2016)

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(Presentations in this blog were created using the Premium Financing System and Wealthy and Wise®.)

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Alex and Ana Demas are both age 40.  He is the executive vice president of Hawthorne Construction, Inc., a family-based company.  Alex is not currently a shareholder in the firm.  Ana is a CPA.

Hawthorne Construction has decided that part of his new benefit plan will include a leveraged executive bonus plan funded with $2,875,000 of indexed universal life (IUL).  The policy is max-funded with five level premiums of $100,000 funded with deductible bonuses by the company paid to Alex.  Alex will offset the resulting income tax liability on each bonus by way of a bank loan secured against the IUL.

There is more than sufficient cash value in the early years of the IUL to allow Alex to accrue the loan interest with the bank rather than pay it out-of-pocket.  Including accrued loan interest, the cumulative loan never exceeds 50% of the policy’s illustrated cash surrender value during the first 10 policy years making it a relatively easy bank loan to negotiate.  Alex intends to use a participating policy loan at the beginning of year 11 to repay the bank loan.

Click here for a discussion of fixed vs. participating loans.

Using the bank loan to fund the income tax eliminates the need for a more expensive variation of an executive bonus plan in which the company “grosses up” the annual bonus to provide the funds for the premiums and the income tax on the bonus.

The goal of the compensation package is to induce Alex to remain with the company for at least 10 years — and, optimistically, until retirement.

Below is a graphic of the results:

Image 1
Costs and Benefits of
Income Tax Financing of the
Leveraged Executive Bonus Plan

blog-127-img-1-Costs-and-Benefits-of-Income-Tax-Financing-of-the-Leveraged-Executive-Bonus-Plan

1For retirement cash flow.

2The cumulative loan due the bank is repaid in year 11 by way of a policy loan.

This is an impressive executive benefit!  No out-of-pocket cost for Alex coupled with $4.8 million in after tax retirement cash flow, and all provided by Hawthorne Construction for an after tax cost of $65,000 a year for five years.

Click here to review this leveraged executive bonus plan from the InsMark Premium Financing System.  (Pages 8 and 9 show the Summary numbers.)

Alex and Ana’s Retirement Plan

The leveraged executive bonus plan provides a significant benefit for Alex and his family; however, its value can be most appreciated if it is integrated into their overall retirement plan.

Starting at age 65, Alex and Ana’s current retirement goal is to provide $200,000 a year in after tax, spendable cash flow with a 3.00% inflation adjustment.

Below is a summary of their current net worth:

Net Worth
Alex and Ana Demas

blog-127-img-table-1-Net-Worth-Alex-and-Ana-Demas

Click here for comments on Monte Carlo simulations.

Let’s first compare their current retirement plan (Strategy 1) with Strategy 2, a variation that includes values from Alex’s leveraged executive bonus plan described above.

Image 2
Net Worth Comparison
(Strategy 1 vs. Strategy 2)

blog-127-img-2-Net-Worth-Comparison-Strategy-1-vs-Strategy-2

The bonus plan increases their long-range net worth by almost 250% while maintaining their desired retirement cash flow.  There are no additional out-of-pocket costs required from Alex and Ana.

Click here for instructions on importing data from our Premium Financing System into Wealthy and Wise.

Let’s next add a Roth conversion (Strategy 3) into the mix producing the following result:

Image 3
Net Worth Comparison
(Strategy 1 vs. Strategy 3)

blog-127-img-3-Net-Worth-Comparison-Strategy-1-vs-Strategy-3

The long-range net worth has increased over Strategy 1 by slightly over 500%.

We converted the Roth in $50,000 annual increments and withdrew the resulting income tax from their asset base (which is reflected in their net worth) — so again there are no additional out-of-pocket costs required from Alex and Ana.

Below is the comparison of all three Strategies:

Image 4
Net Worth Comparison
(Strategy 1 vs. Strategy 2 vs. Strategy 3)

blog-127-img-4-Net-Worth-Comparison-Strategy-1-vs-Strategy-2-vs-Strategy-3

Wealth to heirs is also significantly impacted by Strategies 2 and 3.

Image 5
Wealth to Heirs Comparison
(Strategy 1 vs. Strategy 2 vs. Strategy 3

blog-127-img-5-Wealth-to-Heirs-Comparison-Strategy-1-vs-Strategy-2-vs-Strategy-3

Note:  Another reason to convert to a Roth is the impact of inherited Roth values for heirs.  In the forthcoming Blog #129 (Part 3 of this series), I’ll discuss how this will impact Alex and Ana’s daughter, Lexie.

The large increase in Alex and Ana’s net worth raises an inevitable question:  How about less net worth and more tax free, retirement cash flow?  Below are the results of Strategy 4 if we increase Alex and Ana’s retirement cash flow by 50% (up by $100,000 a year also indexed by 3.00%).

Image 6
Net Worth Comparison
(Strategy 2 vs. Strategy 3 vs. Strategy 4)

blog-127-img-6-Net-Worth-Comparison-Strategy-2-vs-Strategy-3-vs-Strategy-4

Note:  We deliberately dropped Strategy 1 (Current Plan) as it is the least efficient plan.  To review its results, see Images 4 and 5.

Below is the wealth to heirs analysis:

Image 7
Wealth to Heirs Comparison
(Strategy 2 vs. Strategy 3 vs. Strategy 4)

blog-127-img-7-Wealth-to-Heirs-Comparison-Strategy-2-vs-Strategy-3-vs-Strategy-4

Click here to review the 125 pages of reports from Wealthy and Wise that make up the numbers in Image 6 and Image 7.  This is a large number of reports; however, with a Wealthy and Wise evaluation, I recommend that you have all the reports for a given case with you when you are visiting with a client or client’s attorney or CPA.  Wealthy and Wise backs up every number shown, and you never know which report you’ll need to answer the inevitable question, “Where did this number come from?”  That’s why I provided all of them to you in this Blog.  Tip:  The name of each strategy appears at the bottom right of each detailed report.

Most Wealthy and Wise users select a few key illustrations for the main report and put the balance in an Appendix.  More elaborate report organization can be accomplished (Table of Contents and Section pages) through use of this prompt which I used that is available at the bottom right of the Main Workbook Window.

blog-127-img-8-Preview-or-Print-Client-Presentation

Summary of the Four Strategies

blog-127-img-table-2-Summary-of-the-Four-Strategies

Conclusion

By integrating the leveraged executive bonus plan within the retirement plan, Alex and Ana’s appreciation of the executive benefit should increase exponentially.  Hawthorne Contracting should get considerable additional credit (and loyalty) for being the sponsor of the plan that adds so much to their overall wealth.

Indexed universal life insurance is one of the stars of this Blog.  This reminds me once again of Bill Boersma’s comment in his article in the December 2014 issue of Trusts & Estates in which he discusses life insurance as an asset class: “I can only wonder if another asset with the same qualities would be implemented more frequently if it wasn’t called life insurance.”

Prospecting

Candidates for a leveraged executive bonus plan are simple to identify if you pose the following questions to the head of a business (C corporation, S corporation, LLC, Partnership — even a tax exempt organization):

“Do you have any non-owner executives or minority shareholders who are so valuable to your business that you will do whatever is economically reasonable to induce them to stay with you?”

“I’d like to show you a related concept — deductible to the firm — that easily outperforms any qualified retirement plan.  It can be used just for you — or by others you designate.  Would you like to see how it works?”

The impact of integrating executive benefits into an overall Wealthy and Wise analysis should be of great interest to companies that offer such benefits as the perception of the value is increased exponentially.

Documentation

Special documents are needed to support a Leveraged Executive Bonus Plan.  They typically consist of a standard executive bonus arrangement supplemented by an Endorsement of Policy Ownership Rights which precluding the executive from accessing any of the policy values for a predetermined number of years (or until a certain event occurs such as retirement).

The Endorsement is registered with the issuing insurance company and, as a result, the executive is unable to take any action on the policy other than that allowed by the Endorsement.  One of life’s frustrating experiences for an employer involves an executive who starts a competing business using funds from an employer’s benefit plan that were designed to provide retirement cash flow.  The Endorsement can eliminate this occurrence.

Comprehensive specimen documents for all aspects of an Executive Bonus Plan are available in Version 21.0 (and higher) of InsMark’s Cloud-Based Documents On A Disk™ in the Key Employee Benefit Plans section.  These documents, coupled with the bank financing documents, are what make up a Leveraged Executive Bonus Plan.

Note:  InsMark’s Leveraged Deferred Compensation System has a module that creates a different source of leverage whereby the employer makes the loan for the income tax liability on the bonus.  This variation is often applicable for smaller cases where bank financing is unavailable.  In general, I believe the bank-financed arrangement produces superior results.

Licensing InsMark Systems

To license the Premium Financing System or Wealthy and Wise or Cloud-Based Documents On A Disk, visit us online or contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275).  Institutional inquiries should be directed to David Grant, Senior Vice President – Sales, at dag@insmark.com or (925) 543-0513.

 

InsMark’s Digital Workbook Files

If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.

New Zip File Downloaders
Watch the video.

Digital Workbook Files For This Blog

Blog127.zip

Download all workbook files for all blogs

Experienced Zip File Downloaders Download the zip file, open it, and double click the Workbook file name to open it in your InsMark System.

Note:  If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark System.  Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed.

 

InsMark’s Referral Resources
(Put our Illustration Experts to Work for Your Practice)

We created the Referral Resources listed below to deliver a “do-it-for-me” illustration service in a way that makes sense for your practice.  All are IMOs and InsMark Agency Platinum Power Producers®, and they are highly skilled at running InsMark software.  They will utilize your choice of insurance company, and they do not require a commission split.

Mention my name when you talk to our Referral Resources as they have promised to take special care of my readers.  My only request is this: if a Referral Resource helps you get the sale, place at least that case through them; otherwise, you will be taking unfair advantage of their generous offer to InsMark licensees.

Save time and get results with any InsMark illustration!

Testimonials

“Standard bank financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to really present compelling numbers; however, the integration of that data into InsMark’s comparative modules like Various Financial Alternatives and Wealthy and Wise is really what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®

“As with all of the InsMark software, InsMark’s Premium Financing System has proven to be an indispensable addition to my ability to show my clients the advantages in using bank loans to solve their financial needs.  Because of this, I was able to close three large financed cases easier and faster than ever before.  As always, InsMark has delivered again.  I encourage all who use bank financing as a solution to their clients’ needs to purchase this system.  The cost of the system is not an expense, but rather an investment in your business.”
William Moates, Jr., Trilennium Financial Alliance LLC, Fort Smith, AR, InsMark Platinum Power Producer®

“InsMark has created without question the best suite of software for our industry that has ever existed.  I personally have been using their software for almost 30 years, and it changed my career.  This unique and user friendly software will add many thousands to your income for as long as you’re in business.  InsMark makes me look good, and it will you as well.”
Simon Singer, CFP®, CAP®, RFC®, International Forum Member, InsMark Platinum Power Producer®, Encino, CA

 

Important Note #1:  The hypothetical life insurance illustrations associated with this Blog assumes the nonguaranteed values shown continue in all years.  This is not likely, and actual results may be more or less favorable.  Actual illustrations are not valid unless accompanied by a basic illustration from the issuing life insurance company.

Important Note #2:  Many of you are rightly concerned about the potential tax bomb in life insurance that can accidentally be triggered by a careless policyowner.  Click here to read Blog #51: Avoiding the Tax Bomb in Life Insurance.

Important Note #3:  The information in this Blog is for educational purposes only.  In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique as well as the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.

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Blog #124: More on the Siren Song of “Buy Term and Invest the Difference”

Blog #123: The Siren Song of “Buy Term and Invest the Difference”

Blog #122: Term Insurance for $1.00

 

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Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

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