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[This article examines the purchase of a reverse split dollar plan using a compensation adjustment and an asset allocation technique to replace the after tax cost of that adjustment. It compares the effect on long-term Net Worth of purchasing versus not utilizing the technique as part of an overall retirement strategy. The results are powerfully in support of the reverse split dollar plan, and the presentation technique discussed is among the most important ever developed by InsMark.] Testing
Financial Tolerance For
Private Retirement Plans (Part 3) Part 2 of this series examined the use of asset allocation principles to justify the purchase of a variable universal life insurance policy for a couple, Tony and Samantha Callahan, ages 45 and 40. The planned retirement age of this couple occurring 20 years hence dovetailed nicely with the accumulation phase of the policy. Due to typical surrender charges, such policies must run 15 to 20 years before they have seasoned sufficiently to produce cash flow for retirement income. Let's examine an alternative, in which Tony's corporation funds a reverse split dollar plan for them. Case Study Background: Tony and Samantha are age 45 and 40 respectively. He is a professional sports agent, and she is CEO of a large non-profit hospital. Between them, their gross income exceeds $700,000 and, after tax, their net income is $450,000. Their current Net Worth is almost $2,000,000. Please take a moment to examine their assets on the Client Information Summary from our InsGift System by clicking here. Let's examine the powerful results of providing supplemental retirement benefits via a reverse split dollar arrangement involving variable universal life insurance. The plan involves $2,500,000 of coverage bearing five $100,000 premiums with policy loans of $175,000 a year starting after 20 years -- coinciding with their expected retirement. Typically, Tony leaves no profits in his business -- rather, he tends to pay himself a substantial bonus at the end of each year. He is willing to leave the last $100,000 of bonus in the corporation for each of the next five years -- assuming it can produce efficient results. Solution: We will measure their current retirement plan against a revised plan that includes their share of the reverse split dollar arrangement. Note: Their current retirement plan calls for $240,000 of after tax retirement income in today's dollars -- indexed at 3% for a cost of living adjustment. This means that, in 20 years, their first retirement payment must be $433,467 and, if they both live another 30 years thereafter, their cumulative after tax retirement cash flow must total $20,622,359. Fortunately, using Tony and Samantha's own assumptions, their current plan does provide for this level of retirement cash flow -- with plenty left over. After deducting the required retirement cash flow, their Net Worth under their current plan -- using their assumptions -- is projected to grow from its current base of almost $2,000,000 to over $56,000,000 during the 50 years studied. That is reflected in Strategy 1 in the InsGift graphic below. Strategy 2 injects the reverse split dollar numbers. As you can see, it will cost this couple over $25 million in long-range Net Worth if they don't utilize this financial technique! During the early years of the analysis, there is a slight dip in their overall Net Worth -- due to policy surrender charges. (With a lighter load policy, this could be mitigated.) However, by year 11, Strategy 2 takes the lead and the spread widens considerably thereafter. The heirs are better off as well -- by more than $11 million as the graphic below demonstrates.
Compensation Analysis: If Tony's compensation is reduced by $100,000 a year, in his 45% income tax bracket, it will cost him $53,550 a year (counting his Medicare tax savings, too). Here is some really startling information: We had InsGift "find" this money for him. In other words, we reallocated $53,550 of his and Jennifer's assets to supplement their spendable cash flow during the first five years of the Strategy 2 analysis. Consequently, their $25 million gain in long-range Net Worth is created without their having to reduce their spendable cash flow by the after tax cost of Tony's compensation adjustment. Conclusion: It is not difficult to market a plan like this when there is no personal out-of-pocket cash flow cost to the funding. As Tony and Samantha approach retirement, they may well become more interested in wealth preservation strategies, so this is by no means the end of the evaluation process for them -- because wealth preservation planning usually plays a greater and greater role as clients age. The procedure outlined in this article allows you to claim them as clients now with a data base of their assets. If that data is kept up to date, you have all you will need later to prepare wealth preservation strategies for their consideration. Illustration Systems: The reverse split dollar data was developed in our Leveraged Compensation Plan (LCP) System. If you are not licensed for it and/or the InsGift System and want more information, contact an InsMark Account Executive at 1-888-InsMark (467-6275), or click here. Note: In the LCP System, we used a 22.25% corporate income tax bracket calculated as follows: 15% on the first $50,000 in retained profits plus 25% on the next $25,000 plus 34% on the next $25,000. Overall, the effective bracket averages 22.5% on the $100,000 of retained profits not bonused to Tony. Note: LCP also illustrates equity split dollar solutions funded via compensation adjustments. Space prevents the inclusion of the various backup reports from InsGift that support the graphs displayed in this issue; however, you can review the year-by-year numerical results of the InsGift portion of the analysis by clicking here, and the reverse split dollar numbers by clicking here. Downloading Data: Leveraged Compensation Plan users can review all reports and related menu inputs we used to create the reverse split dollar analysis in this issue by downloading the LCP Workbook named LCP118.!wb from the Workbook Download section of this website: On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page, then click on Marketing Alerts. To download now, click here. InsGift users can review all reports and related menu inputs we used to create the Net Worth analysis in this issue by downloading the InsGift Workbook named MA118.!wb from the Workbook Download section of this website. On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page, then click on Marketing Alerts. To download now, click here. After downloading, you can import either Workbook by clicking on Client Workbook/Import Workbook on the Main Toolbar of the corresponding System. Note: Part 4 of this series covers a situation similar to Tony and Samantha's, but involves a couple much closer to retirement. |
