Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 A Survivor’s Income Benefit plan also called a Death Benefit Only plan (DBO) is an agreement between a corporation and an employee in which: ─Corporation agrees that if the employee dies before retirement, it will pay a specified amount or amount determined by a specified formula to the employee’s spouse or another designated class of beneficiaries, such as the employee’s children –The amount may be a multiple of salary, such as two, three, or five times the average base pay in the three years preceding death What Is A Survivor’s Income Benefit (SIB) Plan?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 A survivor’s income benefit plan should not be linked in any way with a plan that provides any kind of post- retirement annuity benefits What Is A Survivor’s Income Benefit (SIB) Plan?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 When additional income is desired for the family of an individual in a high estate tax bracket When an employer would like to provide a selected employee(s) with an impressive fringe benefit over and above that provided under a qualified retirement plan When Is Use Of An SIB or DBO Plan Appropriate?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 When a client presently covered under a split dollar arrangement is experiencing rapidly-increasing economic costs and has run into Sarbanes-Oxley issues, or the split dollar arrangement has been terminated –The split dollar plan could be converted into a survivor’s income benefit plan, so that the security could be continued without the income tax burden When Is Use Of An SIB or DBO Plan Appropriate?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 When a corporation would like to provide an immediate death benefit for the family of a young employee, which could later be coupled with a retirement benefit –By changing the SIB at retirement to a nonqualified deferred compensation plan When Is Use Of An SIB or DBO Plan Appropriate?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 Example: –Corporation as an inducement to its Senior Executive makes a legally binding promise that if she should die while an executive for the corporation: The corporation will pay her two children a benefit of three times her average annual base salary for the three years prior to death, up to a maximum of $500,000 Payments to be made in equal annual installments over 10 years (assume $50,000 per year) –Assume the corporation is in combined 40% income tax bracket –The corporation can finance its obligation by purchasing a life insurance policy on the executive’s life The policy would be owned and payable to the corporation How Is It Done?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 Example (cont’d): –At executive’s death the corporation uses the proceeds to purchase $500,000 of tax-free municipal bonds Assuming the bonds earn 8%, net income form the bonds would be $40,000 per year Corporate cash inflow would be $40,000 Corporate cash outflow would be $50,000 - $20,000 (40% tax deduction) = $30,000 Corporation has a positive net inflow for the 10 years of $10,000 per year = $100,000 surplus + $56,455 interest earned at 8% The surplus is probably enough to reimburse the company for its costs, the use of its money, and any administrative expenses it may have incurred How Is It Done?

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 The premiums that the corporation pays on the life insurance policy covering the insured employee are not deductible Life insurance proceeds received by the corporation at the employee’s death are income tax free. Proceeds may be subject to AMT Payments made by the corporation to the designated beneficiaries are deductible if and to the extent that –such payments represent reasonable compensation for services that the employee rendered, and –the plan serves a valid business purpose Tax Implications – Employer

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 With a properly drafted plan, none of the death benefit of an SIB plan will be includable in the covered employee’s estate Payment of premiums by the corporate employer will not be income to an employee IRS now agrees that when the taxpayer and his employer enter into a DBO plan, there is no taxable gift to the beneficiary, either at the time when the plan is entered into, or upon the death of the employee Tax Implications – Employee/Beneficiary

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Payments received from a corporation by beneficiaries will be treated the same as salary (deferred compensation) Tax Implications – Employee/Beneficiary (cont’d)

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Determine whether the employee’s spouse has a community property interest in the survivor’s income benefit, especially in the event of divorce, subsequent remarriage, or death In the case of death, –many states and the IRS consider the SIB plan a property right –written consent is necessary, if a spouse has a community property interest, in order to dispose of this personal property right to a third party beneficiary Issues In Community Property States

Survivor’s Income Benefit Plan Chapter 53 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 In the case of divorce, there is no definitive answer, however, –At the time of the proceeding there are no current property interests that can be divided equally between the spouses, –The possibility of payment is remote, and –The present value of the benefit is difficult to calculate Issues In Community Property States