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Deferred Equity Split Dollar -- This article shows how the "option" concept works using Deferred Equity Split Dollar, technically known as Endorsement Split Dollar with a Section 83 Rollout. The presentation shown in the accompanying material is in compliance with both IRS Notice 2002-8 and the recently published proposed regulations. Case Study: Although the concept can be used with any level of employee, our example will involve Robert Haynes (age 45), a non-stockholder executive vice president of a family-owned lumber company, Hudson Mills, Inc. The company has no intentions of "going public" yet wants to provide Robert with a wealth-producing option as an inducement to his staying with the company for at least the next, say, five years. Here is how the plan works:
Essentially, what we have constructed is a form of "stock" option except, in this case, the "stock" is the portfolio of securities represented by the cash value of the variable universal life policy. Based on Robert's risk tolerance, this can be as conservative or aggressive as he wants. The attached illustrations show the results of the plan (click here to view them); however, Table 1 below highlights the key years of family protection as well as the "private bank" of cash value that will certainly serve Robert well in his retirement years. Deferred Equity Split Dollar Table 1
*after allowing for the withdrawal needed to pay the income tax on the rollout The overall result to the company is a write-off at the beginning of year 6 that produces $85,000 in tax savings as shown in column 1 of Table 2 below. (Details of this are available on Page 4 of the illustrations (click here to view.) During the first five years, the company has the offsetting cash values shown in Column (3) of Table 2 to carry on its balance sheet. Consequently, during the first five years, the maximum cumulative impact on earnings is $28,893 in year 2 ($100,000 premiums minus $71,107 cash value). At rollout, the final cost of the plan to the company of $165,000 is established. ($250,000 in cumulative premiums less $85,000 in rollout tax savings equals $165,000.) Table 2
After the policy is rolled out to the executive, the company has no further interest in it. Alternatives: At first glance, it may appear that an Executive Bonus Plan with Deferred Access (using an endorsement of ownership rights) might be a reasonable alternative. We don't think so -- such plans require the executive to pay the income tax on the bonus as each premium is paid (unless the employer uses a gross-up bonus which would, of course, add considerably to the plan's funding cost). In addition, an Executive Bonus Plan with Deferred Access only defers access to the cash values, it does not cause forfeiture as does Deferred Equity Split Dollar if the executive fails to meet the terms of the Conditional Assignment which, in Robert's case, requires continued employment for five years. Conclusion: Deferred Equity Split Dollar is a unique death benefit and retirement planning device for employers to offer their key executives who are minority or non-shareholders. It has no particular use for a sole or majority shareholder since an owner usually has no need to provide golden handcuffs for himself/herself in order to induce employment retention. (For an equity-type alternative, sole or majority shareholders should consider the Leveraged Benefit PlanÔ , part of the new InsMark Section 7872 Illustration System which complies with both IRS notice 2002-8 and the recently published proposed regulations.) The graphic below illustrates the power of Deferred Equity Split Dollar, and most executives would be thrilled to be furnished with these benefits. (For larger cases, mentally add a zero to all the numbers.) Robert's 40 Year Analysis Note: The concept examined in this article works with any form of cash value insurance. Resources: The accompanying illustrations were prepared using the Endorsement Split Dollar with a Section 83 Rollout module (located under the Executive Benefits tab) in Version 10.0 of the InsMark Illustration Systemâ ("IIS"). We customized the title to read "Deferred Equity Split Dollar". (Some may view this particular name customization as being misleading to professional advisers who are quickly becoming aware of the demise of classic Equity Split dollar and may confuse it with Deferred Equity Split Dollar. In reality, Equity Split Dollar really does remain a viable concept using this new deferred variation; however, if the name we invented concerns you, either retain the formal name of this new plan -- Endorsement Split Dollar with a Section 83 Rollout -- or invent something else like "Executive Benefit Plan".) If you are licensed for IIS and would like a copy of the Workbook we used to prepare the case, you can review all the menu inputs by downloading the IIS Workbook named MA141.!II from the Workbook Download section of our website at www.insmark.com. (On our main webpage, click on Producer's Center, then click on the Workbook Download icon at the top of the next page.) After downloading the Workbook, you can import it into your System by clicking on Client Workbook/Import Workbook on the Main Toolbar. Complete specimen documentation for Deferred Equity Split Dollar (including the important Conditional Assignment) is available from Version 12.0 (or higher) of InsMark's Documents On A Diskâ or Documents On The NetÔ in a document category entitled Endorsement Split Dollar with a Section 83 Rollout. We also have a Screen Show in PowerPoint format that features Deferred Equity Split Dollar. (In addition to its instructional value for you, it is an excellent seminar presentation.) If you are not licensed for the InsMark Illustration System, Documents On A Disk System, or the Screen Show, and wish to know more about them, please call your Account Executive at 1-888-InsMark (467-6275).
Note: Due to the new split dollar rules, traditional Equity Split Dollar has taken a severe body blow. Deferred Equity Split Dollar will become, in our opinion, a hugely popular executive benefit alternative. It, and the new Section 7872 loan plan mentioned above are both on the cutting edge of 21st Century benefit planning. [Rev. 9-5-02] |
