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Executive Bonus Plans -- This article features an Executive Bonus Plan, the "old reliable" of the fringe benefit world. Totally unaffected by concerns surrounding IRS Notice 2001-10 and the proposed split dollar regulations, it is the simplest of benefit plans while also being highly flexible in its use. Case Study Beth Clarkson, age 45, is Vice President of Marketing for Capital Broadcasting Co., Inc., a company in the Midwest that owns several radio and TV stations. Beth is a non-shareholder key executive, and the company is reviewing an Executive Bonus Plan that provides Beth with a serious incentive to remain with the company. The policy the company is considering for Beth is $1,000,000 of equity indexed universal life with a continuous premium of $15,000 a year for 20 years. Beginning at Beth's age 65, the policy is illustrated to produce $1,000,000 in cumulative after tax cash flow to supplement her retirement income ($50,000 a year for 20 years using withdrawals to basis and loans thereafter). Beth is a single parent with three children, and the $1,000,000 policy death benefit eliminates her need to carry expensive personal coverage. There are several ways Capital Broadcasting can fund the plan. It could use:
Let's assume that the company chooses the single bonus method in that they believe that Beth should participate in some of the plan's costs -- at least to the extent of the income tax on the bonus. The illustration and graphics on Pages 4 through 10 show the effect of this strategy. Although a "gross-up" bonus would have been a more favorable funding mechanism than the "single" bonus approach, as you review the numbers, can you imagine Beth turning down the plan? Not likely! Note: Over the years illustrated, Beth would have to earn a compounded pre-tax annual rate of return of 18.52% on her plan costs to duplicate the cash value and after tax retirement income that are illustrated to result from her plan. Restricted Access Will Capital Broadcasting require Beth to sign an Endorsement of Ownership Rights Agreement ("EOR")? It may or may not -- depending on the company's desire to restrict her access to policy values.
If it is used, an EOR typically provides that Beth does not have the right, without the prior written consent of Capital Broadcasting, to surrender the policy for its cash value; make policy loans or cash withdrawals; assign the policy as collateral security; or exercise any other right, privilege, option or benefit granted by this policy other than the right to select, change, and successively change the beneficiaries entitled to receive the policy death benefit. The EOR sets a date for the restrictions to expire which will usually coincide with Beth's expected retirement although other dates could be used (e.g., to coincide with the need for college funds). Also, the restrictions would typically be lifted due to bankruptcy or dissolution of the company. If Beth's employment were to terminate prior to the expiration of the restrictions, the policy would continue to be owned by her; however, the terms of the EOR would continue to prohibit her access to policy values until the restrictions are lifted as defined in the EOR. (One significant advantage of this to a sponsoring employer is that policy cash values are not available to the terminated executive for funding a competing business venture.) Whether an EOR is used or not, Capital Broadcasting is not entitled to receive any of the benefits of the policy at any time. Should Beth's employment terminate prior to retirement, Capital Broadcasting would undoubtedly cease the bonus payments to her. If she then wanted to retain the full benefits of the policy, she would pay any remaining premiums with her own funds (unless a new employer continued the bonus arrangement). Note: In all cases, the approval of a client's legal and tax counsel must be secured before implementing an EOR. Illustrations The reports and graphics in this issue were prepared using the Executive Security Plan module available under the Executive Benefits tab in the InsMark Illustration System. To view the reports, click here. The header on the illustration pages was customized in the illustration module. Workbook If you are licensed for the InsMark Illustration System, you can download the Workbook containing the attached illustrations from our website. (The workbook also contains illustrations for the "gross-up" and "variable" bonus strategies.) By reviewing the Workbook, you can see the exact answers to menu prompts in order to duplicate the presentation logic. To download, go to our website at www.insmark.com, click on Producer's Center, click on the Workbook Download icon at the top of the next page, click on the Concept Library icon, and download the Workbook named MA143.!II. After downloading, you can import the Workbook into your InsMark Illustration System by clicking on Client Workbook/Import Workbook on the main Menu Bar. To download the Workbook now, click here. If you are not licensed for the InsMark Illustration System, please call an InsMark Account Executive at 1-888-InsMark (467-6275) for details, or click here). Specimen Documentation Specimen documents for both restricted and unrestricted versions of an Executive Bonus Plan are available in InsMark's Documents On A DiskÒ System ("DOD") or Documents On The NetÔ ("DON") System. DOD and DON each contains over 600 specimen documents for business, estate, and charitable markets. For DOD licensing information, please call an InsMark Account Executive at 1-888-InsMark (467-6275). DON is available to institutional clients as an InsMark-managed addition to their websites. Computer Business Card InsMark also has an amusing Computer Business Card ("CBC") entitled "The Story of the Free Dog" which presents Executive Bonus Plans in a compelling manner. It's a great prospecting tool, and licensees for this CBC are authorized to make unlimited copies of it for distribution to prospects, clients and advisers. (One of our Power Producers attributes closing $75,000 of premium to this CBC.) Ask one of our Account Executives about it. [Rev.1-30-03] |
