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Termination Death Benefit for Large Corporations

/// Posted by Bill Sapers

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Termination Death Benefit for Large Corporations: How Not to Lose Benefits to Taxes, While Insuring Recovery of Accrued Liabilities

It is a hard, somewhat morbid, topic to face, but the death of business executives at large companies is a financially fraught time for both the company and family of the executive alike. The financial payout of termination benefits  at the death of an executive is taxed heavily, usually leaving between 30-35% of benefits after estate and income taxes to their heirs.

Having spent a lifetime analyzing such situations and dealing with them first hand, I can definitively say that I’ve found a better way for all parties to plan for such difficult moments. To first test my theory, I spent a number of months searching through the proxy statements of large corporations who have had executives die while employed. I calculated how much the company paid out in “death benefits” (salary, incentive bonuses, stock options, etc.) that were promised to the employee and now passed on to their estate. In most every case, the company paid large amounts, which were then taxed through the roof leaving only a small portion of what was promised. 

An insurance methodology we’ve developed has been shown to mitigate, even erase, the financial losses on both sides. By taking out a life insurance policy on executives, a company can ensure that executive beneficiaries receive 100% of the benefits promised in the executive contract with little or no taxes. Furthermore, the employer recaptures the accrued expense of the promised benefit and receives a full refund of all premiums paid at death. If the executive employee leaves or retires before death, the company can cash in the insurance policy and still receive an amount equal to the premiums paid. For a large cash rich company able to pay out premiums, there is no downside.

For Example:

Assumptions:

  • Executive Age 60
  • Retirement age 70
  • Needs $10,000,000 termination benefit at death
  • Premium $767,070/year
  • Assume market return of 3.95%
  • Executive in 30% tax bracket
  1. If death occurs 1st year, Corporation gets $767,070 death benefit – equal to premium. Executive, if set up properly, leaves heirs $10,000,000 – no income taxes and no estate taxes.
  2. If death occurs 10 years after plan is adopted, corporate outlay would have been $5,369,491 and the corporation would receive a death benefit of $5,369,491. In addition, the corporation would recover all of its accrued liability. Meanwhile, the Executive’s beneficiaries, instead of receiving $3,000,000 net after estate and income taxes, would get $10,000,000.
  3. If at age 70, the Executive were to retire, the Corporation would cash in the policy receiving a projected sum of $5,641,213 ($265,000 more than its $5,369,491 premium outlay), the Executive would receive their promised termination benefits.

For more information around insuring against Termination Death Benefit losses, please reach out to discuss options, plans, and particulars.

Why Staying the Course is Helpful

/// Posted by Karen Van Voorhis

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I am not normally a fan of Jim Cramer, the loud, stock-picking host of CNBC’s “Mad Money.” That said, this week on the TODAY show he had a sensible reflection about the recent days’ market decline: “No one ever made a dime panicking.”

True!

Most advisors, including me, preach staying the course, having a long-term goal, and an asset allocation model. We caution against selling out, especially now. We talk about risk/reward tradeoff, and pride ourselves on educating investors that the stock markets reward us in the long run for taking on additional risk.

All of this is easier said than done, of course. Especially in volatile markets like we’re experiencing now, especially with the 2008-2009 stock market crash still looming large in our memories.

One of the most satisfying conversations that I ever had with a client happened during the decline of 2008. I was checking in with him to see if he still felt okay about his overall stock-to-bond ratio (which was heavily stocks). His reply was an uncommon one: “If our allocation was fine for us a few weeks ago, then it’s fine for us now, and it will still be fine a few weeks from now, regardless of what happens.” At a time when many people were automatically thinking, “Oh, no, I have way too much in stocks – time to pull back!,” this client was thinking more clearly (albeit counter-intuitively!).

One of the worst things that you can do for a portfolio is to change allocations according to the stock market environment – that is, moving to a more aggressive allocation once the market is up (to enjoy, in theory, any remaining upswing), and moving to a more conservative allocation once the market is down (to avoid, in theory, any further falls).

These sorts of activities usually make us feel better in the short term – the value of which should not be dismissed! However, either of those moves usually results in selling low (after the markets have dropped) and buying high (after the markets have risen), both of which are the opposite of what we’re all supposed to be doing, right?

The best allocation is an “all-weather” one – enough in stocks so that you are happy with your stock allocation in a good stock market (you don’t feel like you are missing out on any upswing), and not so much in stocks that you are worried in a down market (you don’t wish you had less allocated to stocks during a downturn).

We all do better with a little bit of guidance. Talk to your advisor if the recent market volatility is making you wonder whether your current allocation is the right long-term one for you.

If you’d like additional material, please read this summary on the current volatility being caused by the China market as well as “Eleven Tips for How to Stay Sane in a Crazy Market.”

Using asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Please note: This blog post was originally written in 2015.  However, in light of the recent market volatility, S&W decided to present it again because the same principles are still very relevant and applicable today.

Will Debt Spoil Too Many Retirements?

/// Posted by Carol McShera

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What pre-retirees owe could compromise their future quality of life.

The key points of retirement planning are easily stated. Start saving and investing early in life. Save and invest consistently. Avoid drawing down your savings along the way. Another possible point for that list: pay off as much debt as you can before your “second act” begins.

Some baby boomers risk paying themselves last. Thanks to lingering mortgage, credit card, and student loan debt, they are challenged to make financial progress in the years before and after retiring.

More than 40% of households headed by people 65-74 shoulder home loan debt. That figure comes from the Federal Reserve’s Survey of Consumer Finances; the 2013 edition is the latest available. In 1992, less than 20% of Americans in this age group owed money on a mortgage. Some seniors see no real disadvantage in assuming and retiring with a mortgage; tax breaks are available, interest rates are low, and rather than pay cash for a home, they can arrange a loan and use their savings on other things. Money owed is still money owed, though, and owning a home free and clear in retirement is a great feeling.1 

Paying with plastic too often can also exert a drag on retirement. Personal finance website ValuePenguin notes that the average U.S. household headed by 55- to 64-year-olds now carries $8,158 in credit card debt. As for households headed by those aged 65-69, they owe an average of $6,876 on credit cards.2

According to the latest Weekly Rate Report at CreditCards.com, the average APR on a credit card right now is 16.15%. How many investments regularly return 16% a year? What bank account earns that kind of interest? If a retiree’s consumer debt is increasing at a rate that his or her investments and deposit accounts cannot match, financial pain could be in the cards.3   

 

Education debt is increasing. Older Americans are dealing with student loans – their own and those of their adult children – to alarming degree. In all 50 states, the population of people 60 and older with student debt has grown by at least 20% since 2012. That finding from the Consumer Financial Protection Bureau may be understating the depth of the crisis, which may have its roots in the Great Recession. Fair Isaac Corporation (FICO) says that between 2006-16, the number of Americans aged 65 and older with outstanding education loans has tripled.4,5

Just what kind of financial burden are these loans imposing? According to FICO, the average 65-or-older student loan borrower is dealing with a balance of $28,268. That is up 40% from the average balance in 2006.5

What can you do?

The key to managing through various types of debt prior to retirement starts with budgeting. A good exercise at any age is to calculate out your monthly budget to determine what disposable income is available to you to balance various debt management and savings goals. You can determine your monthly disposable income by subtracting your essential spending needs (housing, food, health care, transportation, childcare & other monthly obligations) from your monthly take-home pay.

Once you’ve determined your monthly disposable income, then work to build and maintain an emergency fund of 3-6 months of those essential spending needs. Then save for retirement in your workplace savings plan at least to the amount to receive your full employer match. Many people enter their workplace savings plan at a 6% contribution rate and increase their contribution rate by 1% per year around the time of their annual salary raise.

After addressing these initial savings goals, shift your attention to managing your outstanding debt. Attack your high-interest credit cards first, then your lower-interest ones. Or, look into consolidating your balances. Regarding student loan debt, pay off private student loans, which tend to have higher rates than government loans.

After paying off debt with an interest rate over 8%, considering saving more into your workplace retirement savings plan. A good target is 15% of your pre-tax pay.

Once high interest rate credit debt & private student loans are paid off and you are saving enough into your retirement plan to replace 70-85% of your income in retirement, begin paying off lower interest rate government debt and mortgages more aggressively to pay them off prior to entering retirement.

__________________________________________________________________________

This material was prepared by Sapers & Wallack and MarketingPro, Inc.,. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – nytimes.com/2017/06/02/business/retirement/mortgages-for-older-people-retirement.html [6/2/17]
2 – valuepenguin.com/average-credit-card-debt [9/28/17]
3 – creditcards.com/credit-card-news/interest-rate-report-92717-unchanged-2121.php [9/27/17]
4 – consumerfinance.gov/about-us/blog/nationwide-look-how-student-debt-impacts-older-adults/ [8/18/17]
5 – newsday.com/business/65-plus-crowd-facing-growing-burden-from-student-loan-debt-1.14124052 [9/10/17]

 

One of the bread-and-butter staples of a well-conceived employee benefit program is the classic group term life insurance.  You join a company, fill out a beneficiary form, and voila, you are provided with group term life insurance equivalent to a multiple of salary, such as two times annual earnings.  You don’t think much of this benefit until you receive your W-2 form at the end of the year.  Imagine your surprise when you look at Box 12, Code C, and find a taxable cost in the thousands!

Group term life insurance is taxed under IRC Section 79.  An employee is allowed to exclude any cost for the first $50,000 of coverage provided.  Amounts of insurance over $50,000 are considered income to the employee, and taxed using the Uniform Premium Table (Table I) in IRC Section 79.  The dollar amount added to the employee’s taxable income is calculated based on the employee’s age and amount of coverage.  Since Table I uses outdated and artificially inflated rates, the cost to the employee can be significant.

Many of our clients are surprised and exasperated by the high tax cost they are forced to report, and come to us seeking solutions.

For those individuals who do not need the insurance, naming a charitable organization as a beneficiary of the group term policy is a terrific solution to avoid the Table I tax.  And if the employee actually needs the life insurance coverage and is healthy, the employee can go out and purchase an individually owned and controlled term life insurance policy that will actually cost the employee less than the aforementioned group term.  We call this concept the two-fer: benefitting two beneficiaries (charity and personal) for one cost.  Think about this again.  For less than the cost you were previously paying for your group term life, you have benefitted a charity and improved your personal life insurance portfolio via a portable policy with level premiums and no automatic age reductions.

As an example, let’s review the economics of a male, age 58 who has $800,000 of group term life.  The initial $50,000 of coverage is a freebie to the employee.  From ages 58 to 67, the employee will report taxable income on $750,000 of coverage totaling $71,730!  At a 40% tax bracket, this “free” benefit has actually cost the employee close to $29,000!  Alternatively, if the employee designates a charity as beneficiary of the group term amount, the employee avoids this astronomical tax cost. Simultaneously, the employee can go out and replace the $750,000 of coverage at a cost of only $1,567 per year, or $15,670 over 10 years.

You owe it to yourself and your beneficiaries to investigate the better solutions to this costly, “free” benefit. Most people don’t like paying taxes. Paying taxes needlessly is worse.

Protecting your Identity and Credit Following the Equifax Breach

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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The Federal Trade Commission has posted a valuable blog post entitled The Equifax Data Breach: What to Do, which we recommend you review.  

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Are You In Danger of Outliving Your Life Insurance Policy?

/// Posted by Ed Wallack

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When individuals purchase permanent insurance (whole life, universal life, variable life), as opposed to term insurance, the expectation is that the policy will remain in force as life insurance until death of the insured. However, due to a marked increase in longevity, many are likely to survive to the end of the mortality tables on which their life insurance policies are based. The bottom line is that there is a grave and imminent danger that many life insurance policies will terminate at age 100 and expose the policy owner to adverse income tax consequences.

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Everyone Needs an Estate Plan!

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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Make sure your plan matches your stage in life

Most people do not like thinking about their own death or the death of family and friends.  Benjamin Franklin famously wrote: “… in this world nothing can be said to be certain, except death and taxes.”  Simply stated, the reason to have your own estate plan drafted is to provide for the orderly administration of your affairs (financial and otherwise) in the event of your incapacity or death.  For many, the words ‘estate plan’ conjures images of luxury and affluence, though everyone, regardless of financial resources should have an estate plan.  To help prove our point, here are some of the top reasons each of the following personas should make creating/updating their estate plan a priority.

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Summer: An Unlikely Time for Changing CPAs

/// Posted by Karen Van Voorhis

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Last year my husband and I knew there was something wrong with our boiler, in the basement of our house. We knew this because we lost heat in the house during the winter – twice. We learned that repairing it would involve dismantling part of it and having no heat for a day. Our plumber, whom we see around town, admonished us several times to make arrangements with him to take care of it during that summer, when our need for heat would be close to zero. And we finally did, one week last June – it was the last thing I wanted to be bothered to do, but when winter and snow came, boy were we happy, and relieved.

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How 529 Plans Can Help Take the Bite Out of the College Price Tag

/// Posted by Mark Alaimo, CPA/PFS, CFP®

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Every May, years of all-night study sessions and grueling examinations endured by thousands of young men and women culminate with graduation and the receipt of a four-year college degree.  While more and more young men and women are attending college, the cost to attend continues to skyrocket.  The Institute for College Access and Success reports that as of 2012, over 70% of students graduated four-year colleges with student debt[1].  66% of graduates from public colleges had debt (with an average balance of $26,000), 75% of graduates from private not-for-profit colleges had debt (with an average balance of $32,000) and 88% of graduates from private for-profit colleges had loans (with an average balance of $40,000)[2]

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It’s International Women’s Day, and I have been thinking about how financial advisors interact with women, especially when those women are one half of a couple, and how I wished both advisors and women would behave differently.

I’ve been to several conferences in recent years, where I find myself in hotel ballroom, listening to a speaker (usually female) patiently explaining to hundreds of (mostly male) financial advisors that they ­should pay attention to their “clients’ wives.” (Let that sink in for a minute . . . . as though the female half of a couple isn’t a client. But I digress.)

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