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For producer or registered representatives use only. Not for use with clients. executive compensation: section 162 executive bonus and loan based split.

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Presentation on theme: "For producer or registered representatives use only. Not for use with clients. executive compensation: section 162 executive bonus and loan based split."— Presentation transcript:

1 For producer or registered representatives use only. Not for use with clients. executive compensation: section 162 executive bonus and loan based split dollar Justin L. Smith, Field Marketing Sales Director ADV 1491

2 For producer or registered representatives use only. Not for use with clients. disclosures This seminar is for informational purposes only. The speakers and presenters appearing at this seminar are solely responsible for the content of their presentations and may not necessarily represent the opinions of Ameritas Life Insurance Corp. (Ameritas Life), or any of its affiliates. Neither Ameritas Life nor any of their representatives are in the business of giving tax, legal, or accounting advice. Attendees should consult with their own accounting, tax, or legal professionals to determine action appropriate for their unique situation. This information is provided by Ameritas ®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to, Ameritas Life Insurance Corp., Ameritas Life Insurance Corp. of New York and Ameritas Investment Corp., member FINRA/SIPC. Ameritas Life Insurance Corp. is not licensed in New York. Each company is solely responsible for its own financial condition and contractual obligations. For more information about Ameritas ®, visit ameritas.com. Ameritas ® and the bison design are registered service marks of Ameritas Life Insurance Corp. Fulfilling life ® is a registered service mark of Ameritas Holding Company. ©2014 Ameritas Mutual Holding Company

3 For producer or registered representatives use only. Not for use with clients. executive bonus and beyond executive compensation – the executive bonus plan

4 For producer or registered representatives use only. Not for use with clients. the importance of our people “Take away my people, but leave my factories, and soon grass will grow on the factory floors. Take away my factories, but leave my people, and soon we will have a new and better factory.” --Andrew Carnegie

5 For producer or registered representatives use only. Not for use with clients. discussion – three main themes Agenda Section 162 bonus plans Company benefits and taxation Executive benefits and taxation

6 For producer or registered representatives use only. Not for use with clients. defined Executive bonus A company financed program for “select” employees – financing is via a compensation bonus to employee Select employee acquires a life insurance policy with company bonus Satisfies the company’s purpose of providing a valuable benefit for the employee and his/her family

7 For producer or registered representatives use only. Not for use with clients. bonus structure The company bonus – types Single bonus – will cover premiums: the bonus is compensation income for the employee – sent directly to insurance company A “second” or “double” bonus will mitigate the income tax due on bonus #1 Bonus can be “restricted” Company deducts bonus payments as compensation income

8 For producer or registered representatives use only. Not for use with clients. policy ownership The policy Is owned 100% by employee Employee designates beneficiaries Death benefits paid to beneficiaries are income tax free Valuable retirement supplement for employee

9 For producer or registered representatives use only. Not for use with clients. plan operation How does the plan operate? Company “selects” employee Company agrees to finance premiums Executive utilizes bonus to pay premiums Executive recognizes bonus as taxable income Company “grosses-up” tax? Company deducts bonus as compensation Employee owns policy Retirement supplement Income tax free death benefit

10 For producer or registered representatives use only. Not for use with clients. company benefits Assist valued employees with their financial planning No IRS approval needed No administrative fees Company can choose employee participants Excellent retention tool Bonus payments are compensation to employee and therefore deductible if “reasonable” compensation

11 For producer or registered representatives use only. Not for use with clients. employee benefits Employee acquires a valuable life insurance policy at very little cost – policy is portable Company sends bonus directly to insurance company Cash values can be used to supplement retirement Death benefits are received income tax free by beneficiaries

12 For producer or registered representatives use only. Not for use with clients. in summary Executive bonus arrangements Ease of implementation/administration Company benefits Provide valuable financial planning benefits Select employees Current tax deduction Executive benefits Low cost insurance Death benefit income tax free Supplemental retirement funds

13 For producer or registered representatives use only. Not for use with clients. next steps Determine type of executive bonus plan -- single, double, restricted Select employee participants Determine bonus amounts Notify valued employees of plan Verify compensation will be characterized as “reasonable”

14 For producer or registered representatives use only. Not for use with clients. LRCASD - split dollar executive compensation – loan regime collateral assignment split dollar

15 For producer or registered representatives use only. Not for use with clients. selective benefits – supplements retirement The regime – loan Why? Supplemental retirement benefits can be delivered through loan regime split dollar The company loans premiums to the executive The executive owns the policy and pays the premium Executive must repay the interest and loans

16 For producer or registered representatives use only. Not for use with clients. discussion – three main themes Agenda Loan regime collateral assignment split dollar plan – minority shareholders (no restrictions) Executive benefits and taxation Company benefits and taxation

17 For producer or registered representatives use only. Not for use with clients. how does loan based split dollar (LBSD) work?

18 For producer or registered representatives use only. Not for use with clients. how does LBSD work?

19 For producer or registered representatives use only. Not for use with clients. policy types for LBSD LBSD or “Loan Based Split Dollar” Goal: Supplemental retirement income Policy types – which one? One that has the potential to build cash value rapidly Policy design – low face Desire to build cash value – no MEC’s Face should meet executives family needs

20 For producer or registered representatives use only. Not for use with clients. steps to make it work 1.Executive purchases an insurance policy 2.Business loans premiums to executive 3.Executive executes note and collaterally assigns policy to business 4.Executive pays premiums with loan proceeds 5.Executive pays loan interest (when) 6.Executive retires loan and business releases assignment 7.Executive – access cash values to supplement retirement 8.Executive – at death, policy death benefits to family

21 For producer or registered representatives use only. Not for use with clients. a closer look at loans Loans are repayable At specified time Upon demand If the note “specifies a repayment date” = term loan If no repayment date and payable at death = term loan measured by executives life expectancy Term loan categories Short – maximum of 3 years Mid – between 3 years and no more than 9 years Long – more than 9 years Notes with no repayment date = demand note

22 For producer or registered representatives use only. Not for use with clients. practical loan issues Loans must be documented This is required for EVERY loan made to the executive In other words, for EVERY loan, a NEW note is required Corporations – corporate RESOLUTION required Policy – don’t forget a COLLATERAL ASSIGNMENT form

23 For producer or registered representatives use only. Not for use with clients. accounting for loans In most business insurance cases – premiums are “annual” Each “premium” is therefore a new loan – requiring a new note For each premium – determine: Should the “new loan” be a demand or term loan? Practical consideration: Demand loans can be POOLED – and even renegotiated to term loans Cannot pool term loans Must stand on its own until its term ends – then renegotiate

24 For producer or registered representatives use only. Not for use with clients. loans – example Pooled Demand Loans Term #1 2.2% Term #2 2.35% Term #3 3.1% Demand #3 Demand #4 Demand #5 Demand #2 Demand #1 Standing on their own until the “term” ends

25 For producer or registered representatives use only. Not for use with clients. loan interest An excerpt from The Insmark illustration If the loan interest paid on each loan is equal to or greater than the Applicable Federal Rate established under IRC Sections 7872(f)(2)(A) and 1274(d), then no additional loan interest will be imputed to the executive.

26 For producer or registered representatives use only. Not for use with clients. loans -- example Term #1 Short Term #2 Mid Term #3 Long 0-3 years.36% years 1.89% 9+ years 3.09% Loans should be for at least the amounts shown, depending on “Term” AFR – August 2014 Blended Annual Applicable Federal Rate --.31% for 2014

27 For producer or registered representatives use only. Not for use with clients. strategy – three fold The “Switch” Growth Reduced Employee Costs Death Benefits The “Payout” Supplemental Retirement

28 For producer or registered representatives use only. Not for use with clients. strategy part 1 – low cost Executive names the beneficiary for excess death benefit over loan amounts due Executive cost: interest rate on loan or tax on “imputed interest” if below market loan Or…if this is an economic benefit regime the cost is “economic benefit” of death benefit Then…“switch” to loan regime BEFORE cash value exceeds the premiums paid Reduced Employee Costs Death Benefits Recommendation: Begin with Economic Benefit Regime

29 For producer or registered representatives use only. Not for use with clients. why economic benefit regime? Taxable on “economic benefit” of insurance MAY be lower than loan interest Executive feels no impact of “interest rate volatility” Executive is not personally liable to repay any premiums – if structured as endorsement split dollar (company owned) The Switch

30 For producer or registered representatives use only. Not for use with clients. strategy part II – growth Occurs BEFORE cash value exceeds premiums paid “Old split dollar” agreements terminated Company and executive create a loan arrangement If it was an Economic Benefit Regime then policy must be transferred to the executive Company and executive execute a note for TOTAL premiums paid to date –now treated as “loan” Don’t forget the collateral assignment for the loans The “Switch” Growth

31 For producer or registered representatives use only. Not for use with clients. strategy part III – distributions The big question – how to “REPAY” the loans? Other personal assets Other business funds Be careful – loan repayment and additional compensation MUST remain INDEPENDENT Reduced Employee Costs Death Benefits The “Switch” Growth The “Payout” Supplemental Retirement Let’s look at “Rollout”

32 For producer or registered representatives use only. Not for use with clients. the rollout Could take loans from the policy to repay the company – remainder belongs to executive Does the executive have a SERP – use the taxable dollars to repay the loan Could use loans from policy to pay the tax on SERP payments Has executive engaged in bracket management over the years? Assets available at 0% or 15% tax to repay loans Executive could take loans from policy to pay tax of 0-15%

33 For producer or registered representatives use only. Not for use with clients. summary When the company wants to build significant supplemental retirement benefits for the executive and receive all sums “loaned” in repayment, LBSD is your key Cost of acquisition can be minimized by beginning with an endorsement split dollar – then switching to loan regime split dollar Executive can rollout of plan with many options, thereby reducing tax burden and maximizing supplemental tax- free retirement funds

34 For producer or registered representatives use only. Not for use with clients. what’s next Find a company interested in providing executive compensation benefits to their executives in the most cost effective way Find a company with an “existing” executive compensation plan and ask, “When was your last executive compensation check-up?” Call your wholesaler to schedule a meeting or reach out to Advanced Markets and discuss the case with them


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