Blog #129: Leveraged Executive Bonus Plan with
Bank-Funding of the Income Tax (Part 3 of 3)

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Summary of Part 1 and Part 2

As you will recall from Blog #127, Hawthorne Construction, Inc., has decided that part of a new benefit plan for Alex Demas 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 financed with deductible bonuses by the company paid to Alex.  Alex will pay the annual income tax on each bonus with funds from a bank loan secured by the cash value of the IUL.

We integrated data from the illustration in Blog #127 into an overall wealth evaluation using our Wealthy and Wise® System which developed some amazing results for Alex and his wife, Ana.

In Blog #128, we introduced an incentive feature called “Controlled Executive Bonus” where we added a condition to Alex’s bonus arrangement that the bonuses must be repaid if he voluntarily leaves the firm during the next 10 years.

Part of the analysis in Blog #127 includes the conversion of $500,000 in IRA assets to a Roth IRA.  The income tax generated by the conversion is paid by a withdrawal for their liquid assets — it is not an out-of-pocket cost.  As a result, Alex and Ana consider the income tax to be an investment, not a cost, as it is the key to an increase in their long-range net worth of almost $8 million.

Note:  Any future contribution to a retirement plan by Alex and/or Ana should likely be directed to a Roth IRA.

Part 3 of the Series

How about Inherited IRAs vs. Inherited Roth IRAs for heirs?

Alex and Ana’s daughter, Lexie, is currently age 15.  Let’s assume she inherits the retirement plan in 50 years at her parents’ joint life expectancy of ages 89/89, which will be Lexie’s age 65.

Below is the comparison of Lexie’s Inherited IRA vs. her Inherited Roth IRA.

Inherited IRA vs. Inherited Roth IRA
Lexie Demas at age 65
Assumed Yield 7.00%

blog-129-img-2-Inherited-IRA-vs-Inherited-Roth-IRA-image

The reason for the discrepancy between the two options?  By Alex and Ana’s joint life expectancy, the required minimum distributions (RMDs) from the IRA result in an initial value for Lexie’s Inherited IRA of $4,470,813 which produces after tax cash flow for her retirement of $6,471,304.  The Roth, with no RMDs, develops an initial value for Lexie’s Inherited Roth IRA of $14,728,531 which produces after tax cash flow for her retirement of $30,455,562 — 470% greater than the Inherited IRA.  This alone is reason enough for Alex and Ana to convert the IRA to a Roth IRA.

If you are not including the giant impact on heirs of inheriting a Roth IRA in your presentations, you are missing out on a major benefit for your clients that they likely have never considered or been shown.

Click here to review the Inherited IRA vs Inherited Roth IRA comparison from the InsMark Illustration System.

Source of the Inherited IRA and Inherited Roth IRA Calculations

Three calculators from the InsMark Illustration System (InsCalc tab) were used:

  • Inherited IRA Calculator
  • Inherited Roth IRA Calculator
  • Comparison of Inherited IRAs

Derived from the Wealthy and Wise evaluation in Blog #127, we used the Defined Contribution Transfer Tax (Summary) report in Scenario 1 and the Roth Defined Contribution Transfer Tax (Summary) report in Scenario 3 to establish the beginning values of Lexie’s inherited retirement plan.

Click here to review those Wealthy and Wise reports.  The value I used as the initial balance for Lexie’s Inherited IRA ($4,470,813) is at her parents’ ages 89/89 in Column (4) on Page 2.  The value I used as the initial balance for Lexie’s Inherited Roth IRA ($14,728,531) is at her parents’ ages 89/89 in Column (4) on Page 4.

This data from the Wealthy and Wise reports was entered into each plan’s respective calculator (IRA Calculator and Roth IRA Calculator) on the InsCalc tab in the InsMark Illustration System (“IIS”).  The results of each were then easily imported into the Comparison of Inherited IRAs Calculator in the same location which is source of the graphic image above.  The IIS Workbook with all three calculators is available below.

Note:  If you would like to review these two Wealthy and Wise evaluations in the context of Blog #127, go to the section entitled System Workbook Files in Blog #127 and request that we email that Wealthy and Wise Workbook to you using the email address indicated at that location.

Conclusion

The benefits for Lexie Demas all stem from the power of the Leveraged Executive Bonus Plan featured in this three-part series of bank-funded income tax on the bonuses.  Without the introduction of that plan’s benefits into the Wealthy and Wise analysis for her parents, none of the features described in Blogs #127, #128, and #129 would be present.

Here is a short summary of the three Blogs in the series:

Blog #127:

Hawthorne Construction, Inc., deducts the bonuses paid to Alex resulting in an annual after tax cost of $65,000 a year for five years.

Alex is rewarded with an executive fringe benefit which, at no personal cost, provides:

  • Pre-retirement, tax free death benefit of $2 million+ for his family;
  • After tax retirement cash flow totaling $4.8 million;
  • Residual policy cash value of $1.7 million.
  • Residual policy death benefit of $1.8 million.

Blog #128:

Hawthorne Construction, Inc., adds a Controlled Bonus feature to Alex’s benefit plan which provides it with near certainty of Alex’s employment for at least the next 10 years.

Blog #129:

A major result of the Roth conversion (outlined in Blog #127) results in a benefit to Alex and Ana’s daughter, Lexie, of an inheritance of an after tax income stream totaling over $30 million through her age 85.  (The Inherited IRA and the Inherited Roth are both subject to RMDs.  As a result, either inherited account is exhausted by Lexie’s age 85.)

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.

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Digital Workbook Files For This Blog

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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.

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

“I really thought I knew all the sales techniques that affect my business, but I do now, thanks to InsMark.”
Sam Keck, MBA, CLU, CFP, LUTCF, InsMark Platinum Power Producer®, Financial Planner, Denver, 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

“Standard bank financing illustrations produce much in the way of great data, but it takes the variations available in 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.  The inherited IRA calculations add even more.”
Chris Jacob, CFP, SFI-Cadeau, InsMark Platinum Power Producer®, St. Louis, MO

“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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More Recent Blogs:

Blog #128: Leveraged Executive Bonus Plan with Bank-Funding of the Income Tax (Part 2 of 3)

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

Blog #126: The Leverage of Bank-Funded Estate Liquidity

Blog #125: Web Supported Resources for You

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

 

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 #121: We Don’t Need the RMDs

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

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Charles and Amanda Fuller are ages 60 and 55.  They are meeting with their adviser to discuss the required minimum distributions (RMDs) associated with Charles’ IRA (current valuation $1,000,000).

After reviewing their retirement plan, they believe the taxable RMDs are not needed and wish they didn’t have to take them.  They would prefer leaving the IRA intact to their daughter, Erin.

One solution to eliminating RMDs while still maintaining control of the retirement account is to convert the IRA to a Roth IRA.  Below is a comparison of the tax consequences of a gradual conversion of the IRA over nine years to spread the income tax cost.

Income Tax Cost of IRA to Roth IRA
35.00% Tax Bracket
Image #1

blog-121-img-1-Income-Tax-Cost-of-IRA-to-Roth-IRA-35percent-Tax-Bracket

Source of the Table: InsMark’s Wealthy and Wise®
(Roth IRA sub-tab on the Retirement Plan Assets tab)

Below are the comparative results assuming growth of 7.00% for the IRA and Roth IRA.  The Roth is projected to end up with 10.6 times more value for their daughter, Erin, than the IRA.

IRA vs. Roth IRA
Image #2

blog-121-img-2-IRA-vs-Roth-IRA

Source of the Graphic:
InsMark Illustration System (InsCalc tab)
(Comparison of IRAs Calculator)

Click here to review the full comparison illustration.  (Year-by-year values are on Page 3.)

“But what about the income tax on the conversion?” asks Charles.

“Let’s see if we can find an efficient way to pay that tax,” responds their adviser.

Case Study
Wealthy and Wise Retirement Planning

The key to the overall retirement evaluation that follows is a comparison of:

The current plan with the IRA versus an alternative plan with the Roth IRA converted over nine years (as shown in the Table above) with the income tax generated by the conversion paid via asset withdrawal rather than an out-of-pocket cost.

Critical to the valuation is this:

Will the use of other assets as a source for the income tax be replaced by the Roth IRA values?

Charles and Amanda plan to retire in five years at their ages of 65 and 60.  Their annual, after tax, retirement cash flow goal is $120,000 indexed at 3.00% as an inflation offset.

Below are the details of their current net worth:

$ 1,400,000 Equity Assets @ 7.00% growth; 2.00% dividend
1,000,000 Retirement Plan Assets @ 7.00%
700,000 Taxable Assets @ 4.00%
800,000 Tax Exempt Assets @ 3.00%
400,000 Residence @ 5.00% growth
     250,000 Personal Property @ -5.00%
$ 4,550,000 Total Net Worth

Click here for comments regarding yields and Monte Carlo simulations.

Below are two graphics of overall Net Worth, one from the Current Plan (Retain the IRA) analysis and one from the Roth Conversion analysis:

Net Worth
Current Plan – Retain the IRA
Image #3

blog-121-img-3-Net-Worth-Current-Plan-Retain-the-IRA

Source of the Graphic: Wealthy and Wise
(Scenario 1: Hypothetical Net Worth Graph)

Net Worth
Roth IRA Conversion
Image #4

blog-121-img-4-Net-Worth-Roth-IRA-Conversion

Source of the Graphic: Wealthy and Wise
(Scenario 2: Hypothetical Net Worth Graph)

Below is a graphic comparing the net worth developed by each Strategy.

Net Worth 1
Current Plan – Retain the IRA
vs.
Roth IRA Conversion
Image #5

blog-121-img-5-Net-Worth-Current-Plan-Retain-the-IRA-vs-Roth-IRA-Conversion

Source of the Graphic: Wealthy and Wise
(Comparison 1: Net Worth Graph)

1 The values for wealth to heirs are identical to net worth since neither Strategy produces any federal estate tax liability under current law.  (3.00% indexing assumption was applied to the annual exemptions.)

The Roth produces $6.7 million more in long range net worth including accounting for the income tax cost of the conversion.  Note that the cumulative retirement cash flow is identical with both alternatives.  ($120,000 a year indexed at 3.00% from ages 65/60 to ages 100/95 years totals $7,255,449.)

Click here to review the full Wealthy and Wise presentation for this evaluation.

Click here for a discussion of the number of reports (50) in the presentation.

The advantages of the Roth conversion are numerous:

  • No taxable required minimum distributions;
  • Funds compound tax free;
  • Funds can be taken out at any time — tax free;
  • With proper planning, the income tax caused by the conversion can be paid from assets, and given the same investment assumptions as the IRA, the Roth should produce a significant increase over the IRA including a repayment of the assets used for the tax.
  • The Roth can reduce the impact of the American Taxpayer Relief Act’s itemized deduction “phase-out” and net investment income “surtax”.

Two Important Resources

Click here for an analysis of the three steps required to duplicate the Roth conversion technique discussed in this Blog.

Click here for an eight-minute video on this vitally important subject called Good Logic vs. Bad Logic®.

Comparison of Inherited IRA vs. Inherited Roth IRA

Valid as the Roth decision is for Charles and Amanda, a major advantage of a Roth goes to children who inherit it.  An inherited IRA and an inherited Roth IRA are both subject to required minimum distributions; however, distributions from an inherited Roth are tax free producing significantly higher cash flow for heirs.

Due to the Roth’s absence of required minimum distributions for the parents, the inherited Roth IRA has a greater beginning account value than an inherited IRA.  This, coupled with tax free distributions from the inherited Roth, produces an astonishing difference in wealth for heirs.  From an inter-generational
perspective, a Roth for the parents transformed into an inherited Roth for children is a winner by a substantial margin for all participants.

Charles and Amanda Fuller’s daughter, Erin, is age 25.  Assume she will inherit the Roth from her last surviving parent at her age 65.  The comparison below is hard to believe, but using the same 7.00% yield assumptions for the IRA and the Roth, the values illustrated, while astonishing, are accurate.

Inherited IRA vs. Inherited Roth IRA
(Erin Fuller at Age 65)
Image #6

blog-121-img-6-Inherited-IRA-vs-Inherited-Roth-IRA-Erin-Fuller-at-Age-65

Source of the Graphic:
InsMark Illustration System (InsCalc tab)
(Comparison of Inherited IRAs Calculator)

Click here to review the full comparison illustration.  (Year-by-year values are on Page 3.)

The inherited Roth IRA produces 16.3 times as much after tax cash flow for Erin than the inherited IRA.  And don’t overlook the fact that Charles and Amanda received the identical after tax retirement cash flow from either alternative during their retirement.  (See Image 5.)

Can you think of a single reason to skip the conversion to a Roth?  Only one — if a client does not have the liquid assets or other resource to absorb the income tax on the Roth conversion.  For everyone else, go forth and prosper!

Note:  Further down in this Blog, those licensed for the InsMark Illustration System can request the System Workbook file that includes the prompts used for Images #2 and #6.  Click here for illustration tips.

Additional Retirement Cash Flow

Imagine this comment from Charles, “There is so much additional net worth developed by the Roth conversion, would it be possible to use some of it to provide more retirement cash flow for us or maybe gifts to Erin now?”

One important feature of Wealthy and Wise allows you to determine how much additional cash flow can be obtained from liquid assets by reducing long-range net worth to, for example, the net worth of the current plan where the IRA is kept as is.  Click here for illustration tips.

In the graphic below, Strategy 3 provides $62,000 a year of additional, level, after tax, retirement cash flow starting at retirement ages 65/60 for total cash flow of $9,425,449, an increase of $2,170,000 (29.9%) over Strategy 1.  Note by doing so, the long-range net worth of Strategy 3 drops to within $10,000 of the original long-range net worth of Strategy 1.

Net Worth 2
Current Plan – Retain the IRA
vs.
Roth Conversion
vs.
Roth + Additional Cash Flow
Image #7

blog-121-img-7-Net-Worth-Current-Plan-Retain-the-IRA-vs-Roth-Conversion-vs-Roth-plus-Additional-Cash-Flow

Source of the Graphic: Wealthy and Wise
(Comparison 2: Net Worth Graph)

2 The values for wealth to heirs are identical to net worth since none of the Strategies produces any federal estate tax liability under current law.  (3.00% indexing assumption was applied to the annual exemptions.)

An alternative solution would be to fund a substantial gifting program for Erin of $48,000 a year of additional, level, after tax, cash flow starting now (five years before retirement at their current ages 60/55).

Below is a net worth and wealth to heirs comparison.  Strategy 4 assumes the gifts fund an investment in a hypothetical equity account at 7.00%; Strategy 5 assumes the gifts fund $2.6 million of indexed survivor universal life at 7.00% owned by Erin insuring Charles and Amanda.  (Either Strategy could be in trust if desired.)

Net Worth
Current Plan – Retain the IRA
vs.
Roth + Gifts to Erin for Investments or Insurance
Image #8

blog-121-img-8-Net-Worth-Current-Plan-Retain-the-IRA-vs-Roth-plus-Gifts-to-Erin-for-Investments-or-Insurance

Wealth to Heirs 3
IRA vs. Roth IRA
vs.
Roth IRA + Gifts for Investments or Insurance
Image #9

blog-121-img-9-Wealth-to-Heirs-IRA-vs-Roth-IRA-vs-Roth-IRA-plus-Gifts-for-Investments-or-Insurance

3 Included in the Wealth to Heirs for Erin is her inherited Roth of almost $15 million noted in Image #6.  Note that the presence of the survivor life insurance has added an extra $4 million in long-range inheritance for Erin.

These results have all developed due to the presence of the Roth, the conversion of which was accomplished with no out-of-pocket cost for income tax.  The Roth is truly an extraordinary financial instrument, and we believe that Wealthy and Wise is an extraordinary tool to demonstrate its effectiveness.

Note:  Further down in this Blog, those licensed for Wealthy and Wise can request the System Workbook file associated with Blog #121 that was used for Images #7, #8, and #9.

Action Plan

There is no better time than near year-end to bring the power of a Roth IRA to all your IRA clients.  Many (if not most) have resisted the conversion due to the income tax consequences.  Powerful results come from using other assets for the funds to pay the tax, i.e., no out-pocket for the tax and typically a significant increase in net worth.  Add in the extraordinary advantage for heirs and a Roth conversion becomes an irresistible financial move.

 

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

Blog121.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!

Joint Interviews

If you want or need help from a qualified producer for joint interviews with any InsMark illustration and are willing to share the case, email us at bob@robert-b-ritter-jr.com, and we will provide you with recommendations.

Testimonials:

“As I’ve said to anyone who will listen, Wealthy and Wise is the best piece of software in the industry.”
Simon Singer, CFP®, CAP®, RFC®, International Forum Member, InsMark Platinum Power Producer®, Encino, CA

“I am writing to give you a ringing endorsement for the Wealthy and Wise System. As you know, I am a LEAP practitioner.  The Wealthy and Wise software has helped me supplement my LEAP skills in the over age 60 client base.  I have been paid for many cases using Wealthy and Wise as support, the smallest of which was $27,000, the largest was $363,000.  With those type of commissions, you would have to be nuts not to buy it.”
Vincent M. D'Addona, CLU, ChFC, MSFS, AEP, InsMark Platinum Power Producer®, New York City, New York

“Major cases we are developing have all moved along successfully because of the sublime simplicity and communication capability of Wealthy and Wise.  I guarantee that the proper use of this tool will dramatically raise the professional and personal self-image of any associate who dares to take the time to understand it . . .”
Phillip Barnhill, CLU, InsMark Gold Power Producer®, Minneapolis, MN

“If you don’t get the client to distinguish cash flow from net worth, you won’t make the case sale.  In my experience, Wealthy and Wise is the only system that recognizes this important estate planning component.”
Stephen Rothschild, CLU, ChFC, CRC, RFC, International Forum Member, Saint Louis, MO

 

Important Note:  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 #120: How We Open and Close 30 to 35 Premium Finance Cases Per Year

Blog #119: Which is the Best Policy for My Clients? (Part 3)

Blog #118: Which is the Best Policy for My Clients? (Part 2)

Blog #117: Which is the Best Policy for My Clients? (Part 1)

Blog #116: Advisor Marketing Break Through: How To Have Qualified Prospects Contact You

 

3 Reasons Why It’s Profitable For You To Share These
Blog Posts With Your Business Associates and
Professional Study Groups (i.e. “LinkedIn”)

 

Robert B. Ritter, Jr. Blog Archive