Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Problem 9-A: Go Fly Delivery Plan elements Document deferral before year deferral begins – nothing retroactive. Specify payout options to comply with 409A – no discretion or wiggle room. Real economic benefit, plus tax deferral. Company gets deduction when income recognized by Burt. Golden handcuffs – hopefully not. Growth on deferral – others may insist be modest. Hardship withdrawal rights – others may object General creditor risk – a given, business must succeed.

Naked Deferred Comp Option Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-11 Pay Benefits Per Agreement Company Executive Nothing funded Executive General Creditor Executive taxed on receipt of benefits Company gets deduction when executive taxed

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Mitigating the Non-Payment Risk Third Party Guarantee – parent company, majority shareholder. Guarantor can not be in the business. Surety Bond – only if obtained and funded by executive. If company does it, will be considered funded plan. Rabbi trust Secular trust with Crummey type executive withdrawal powers. Company owned life insurance program. Split dollar insurance funded program Bonus insurance program

Rabbi Trust Option Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-13 Agreement to pay benefits Company Executive Rabbi Trust Benefits paid on behalf of company Company funds Insolvency Reversion

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-14 Rabbi Trust – Why? Company’s will to pay fades – Rabbi helps Company doesn’t plan for payment burden – Rabbi helps Company’s management doesn’t appreciate costs of plan – Rabbi helps Company goes under – Rabbi doesn’t help

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-15 Requirements of Rabbi Trust Sole purpose to provide plan benefits, except revert on company bankruptcy or insolvency. Duty to notify trustee of bankruptcy or insolvency. Trustee must stop all payments when notified. State law can not grant executive any priority rights in trust over other creditors. Trust can’t be funded with securities of employer. No insolvency trigger or other provision that could frustrate rights of general creditors of company.

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-16 Life Insurance Tax Benefits T ax deferred inside build-up in policy – no income tax on growth of amount in policy. Tax-free borrowing privileges against cash surrender value. Company can use to cover after-tax cost of payments during retirement. Tax-free death benefit – company can use to fund after-tax cost of remaining benefit at employees death or to recoup amounts already paid out under plan. Mitigate financial statement impact – policy shows as growing asset.

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-17 Life Insurance Structuring Options Straight Corporate Ownership Rabbi Trust Ownership Split Dollar – Executive has death benefit that can be estate tax- protected through ILIT Executive Bonus Insurance with Gross-Up

Company Owned Insurance Option Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-18 Pay benefits per agreement Company Executive Insurance Policy Premiums Policy Death Benefit Policy loans

Rabbi Owned Insurance Option Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-19 Agreement to pay benefits Company Executive Rabbi Trust Company funds Excess Policy Proceeds Insolvency reversion Insurance Policy PremiumsPolicy loans Death Benefit Pays benefits

Split Dollar Insurance Option Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-20 Pay benefits during life to executive Company Executive Insurance Policy Premiums Policy Loans Executive ILIT Death benefit over cash value Imputed income Gross-up? Imputed gift- Crummey

Bonus Insurance – Poor Person Trust Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com 9-21 Contingent repayment obligation Company Executive Insurance Policy Premiums Restrictive endorsement – pre-retirement Death benefit Comp for premiums Plus gross-up Loan withdrawals

Copyright 2005 Dwight Drake. All Rights Reserved. Business Planning: Closely Held Enterprises www. drake-business-planning.com Problem 9-B: Jurden Windows Plan elements Company funded, all forward looking, fixed retirement benefit for life (strong incentive) Strong golden handcuffs – if Justin flakes, all is lost. Ideal for company would be performance criteria – very difficult to sell. Deferral should be secure with close scrutiny to avoid all traps. “Teeth” to show benefits will be funded could be handled with insurance. Company’s preference: corporate owned policy. Justin preference: Split dollar or bonus insurance. Possible compromise: Rabbi- owned insurance.