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| August 2008 |
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Terence L. Horan, CLU, ChFC
President & CEO
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For more information about these topics, please contact
Terry Horan
at 513.745.0707.
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Greetings!
We are in the dog days of summer, however, at HORAN we are watching the news in the world of investments and tax to identify trends that will help you, our client, reach your goals.
This newsletter outlines a few ideas that might be valuable for corporate benefits and one idea that involves "selling" life insurance that no longer fits its original purpose. We also outlined two bills recently introduced in Congress dealing with Estate Tax Reform.
Please contact me if you would like additional information on any of these topics. |
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Executive Bonus Plans
In today's increasingly competitive environment, it is getting harder for businesses to find an executive benefit plan to attract, retain, and reward talented executives. Qualified plans have preferential tax treatment, but employers must include all employees and reward everyone to the same degree. The limits on the amount that can be contributed result in lower percentages of compensation that can be contributed by a highly compensated executive. These executives are faced with a form of reverse discrimination when it comes to building retirement income.
Non-qualified plans are easier to administer and allow employers to reward key employees in a discriminatory fashion. However, they still require plan documents, ongoing administration, and face new regulation from Section 409A of the tax code.
Two plans available that may help reward the most productive employees in a way that is flexible, cost effective, and simple to administer are the Executive Bonus Plan and the Restricted Bonus Endorsement Arrangement (REBA). Both of these plans are appealing to key employees, tax deductible to employers and simple to implement and administer. In addition, the REBA can provide "golden handcuffs," an incentive for employees to stay with the company.
An Executive Bonus Plan is an arrangement in which the employer pays a bonus to a key executive by paying the annual premium on a life insurance policy for the executive. The executive will be the owner of the policy and have the right to name the beneficiaries of the policy. The executive also will own any potential policy cash value and be able to access it at retirement via tax-favored loans and withdrawals. |
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A REBA is simply a more specialized form of an Executive Bonus Plan. A vesting schedule is applied to the bonus, and the executive's access to the cash value will be restricted until the executive fully vests.
We help businesses design a customized Executive Bonus Plan that will meet the specific needs and objectives of the company by offering its executives affordable life insurance protection and supplemental retirement income. |
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Life Settlements If you are approaching age 70 or know someone who is, you or they may have a hidden asset worth thousands of dollars. Have you heard of life settlements? A life settlement is an alternative to the surrender of, borrowing against, or cancellation of a life insurance policy.
If you are near age 70 and have insurance that you no longer need, you may be able to receive a lump sum cash settlement for the policy for an amount greater than the cash surrender value. In addition, if you own term insurance, you again may be able to receive a cash settlement for an unneeded policy.
In a life settlement, the amount of money the policy owner receives is based on the insured's age - typically over 70 - and table rating, and the policy's costs, age and cash value. Most policy owners have experienced a decline in their health status since the policy was first issued.
Life settlements carry little risk for the policy owner who no longer needs the insurance. Our clients can sell any kind of individual life insurance policy, including term, whole life, universal life, variable, and second-to-die insurance. Life settlement companies will usually pay more for policies whose owners are in declining health.
Here are reasons why a client may choose to sell a policy:
- The policy may be underperforming, and the client can purchase more cost-effective insurance with the life settlement funds.
- The client needs funds for medical expenses or long-term care.
- An increase in the liquidity of the client's estate eliminates the need for the policy.
- A key-executive policy designed to protect a company from a loss of a key executive is no longer necessary.
At HORAN, we help you navigate this complex transaction so that you receive the largest cash benefit for the policy. These arrangements can be very attractive in the right situation; it is our job to keep you informed of the options available to you and make sure the policy settlement is executed successfully. |
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Estate Tax Reform Estate Tax Reform Bills have recently been introduced in Congress with action set for 2009. On July 15, Rep. Jim McDermott (D-WA), a senior member of the Ways & Means Committee, introduced H.R.6499. On July 17, Sen. Tom Carper (D-DE), a leading Senate moderate, introduced S.3284. Although the two bills differ in their details, both would reverse the (one year only) repeal of the estate tax that is currently scheduled to take effect in 2010.
The following is a summary of each bill.
H.R.6499: The McDermott bill would re-establish a unified credit for estate and gift taxes. It would set the exemption amount for both the estate and gift tax at $2 million per individual, indexed for inflation. A surviving spouse would be allowed to add unused portions of the decedent spouse's exemption amounts toward his or her own exemption amounts. This authority to add decedent spouse's unused exemption amounts would apply for each decedent spouse in situations where a surviving spouse has unused exemption amounts from more than one decedent spouse.
The McDermott bill sets estate tax rates as follows:
- Top rate of 55 percent. The 55 percent rate would kick in for estates above $10 million.
- The rate on estates between $1.5 million and $5 million would be 45 percent.
- The rate for estates between $5 and $10 million would be 50 percent.
- H.R.6499 would also reinstate the credit for state inheritance and estate taxes and would repeal the deduction of state inheritance and estate taxes paid.
S.3284: The Carper bill would retain the current law's separation of the estate and gift tax, and would set the amount of an estate excludible from estate tax liability at $3.5 million. The exempt amount would be indexed for inflation.
The Carper bill sets estate tax rates as follows:
- The top estate tax rate would be 45 percent.
- The gift tax exclusion would be $1 million, with a top gift tax rate of 35 percent.
S.3284 also contains new "simplified" rules for calculating the impact of taxable gifts on the estate tax credit. The date of the giver's death would determine the gift tax rate to be applied. This is a change from current law which establishes the applicable gift tax rate as of the date the gift is given. |
Questions or Comments?
Do you have a question or topic you would like addressed in our next issue?
Please email Kristin Solomon at kristins@horansecur.com or call (513) 745-0707. |
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