Employers
HOW DO WE CONVERT TAXABLE SURVIVORSHIP BENEFITS FROM OUR NONQUALIFIED DEFERRED COMPENSATION PLANS INTO TAX FREE LIFE INSURANCE BENEFITS?
Most large companies have nonqualified deferred compensation plans – including “make-up” 401k and defined benefit programs. Many of these plans accrue substantial benefits for the employees and their families but survivorship benefits are taxable at ordinary income rates to the beneficiaries. In addition, the present value of these benefits will, in many cases, be included in the decedent’s taxable estate.
For example, assuming $5,000,000 of accrued deferred compensation benefits payable at the death of the employee:
Without Estate Tax
|
With Estate Tax
|
|
| Total distribution | $5,000,000 |
$5,000,000 |
| Federal estate tax 45% | 0 |
($2,250,000) |
| State and Federal Income taxes @40% | ($2,000,000) |
($1,100,000)* |
| Net Distribution | $3,000,000 |
$1,650,000 |
| Shrinkage | 40% |
67% |
*The estate tax becomes, in effect, a deduction against distributable income
The solution to is to give plan participants the option to substitute a tax free life insurance benefit for the current taxable benefit. This can be accomplished, in most cases, without a P&L charge to the company and a minor expense to the participant. In addition, the strategy can provide significant cost savings to the company if the employee dies before life expectancy.
Further, the life-insurance benefit may give the employee the ability to make it estate tax exempt through trust ownership of the policy.
Click here to receive our informative report, “How to Convert Nonqualified Deferred Compensation Benefits into Tax-free Benefits”
