Jan 28, 2021

Best of 2020: Restricted Stock and More

2020 Hot Topics: Restricted Stock and More

A new year means new content!  While we get started on 2021’s concepts, take a look at our top three downloads from 2020.  It’s always helpful for us to see what our readers enjoy the most, so that we can continue to create high quality materials to share with you all throughout the year.  2020’s hot topics included restricted stock, NQDC plans, and split dollar life insurance.  Please as always, let us know if there’s anything you’re hoping to see from EBS in 2021.  We look forward to creating and working with you this year.

  • Protecting the Downside Risk of Nonqualified Deferred Compensation Plans
  • Learn the Financial Impact of Deferring Annual RSU Grants
  • Split-Dollar Life Insurance White Paper

1. Protecting the Downside Risk of Nonqualified Deferred Compensation Plans

Topic: NQDC

This White Paper discusses the risks associated with participating in a Nonqualified Deferred Compensation Plan.  It was written in 2018 by Bill MacDonald, Managing Director for EBS-West and remains one of our most downloaded content items every year.

Most companies that sponsor NQDC’s take measures to ensure funds are set aside to fund future benefits.  Many firms establish rabbi trusts to hold these funds, which provides a measure of certainty that the funds won’t be used for purposes other than benefit payments.

But participant balances in NQDC’s are subject to creditor risk, and bankruptcy could result in a loss of the account.  This White Paper discusses the Deferred Comp Protection Trust, a relatively new structure that protects against this risk.

If you’re interested in learning more on this topic, you may be interested in listening to a recorded webinar that features Brian Yolles, CEO of Stock Shield, the firm that created the Deferred Compensation Protection Trust. 

Nonqualified Deferred Compensation

2. Case Study: Learn the Financial Impact of Deferring Annual RSU Grants

Topic: Restricted Stock Units (RSUs)

When stock options gave way to the use of Restricted Stock Units (RSUs), recipients lost the ability to control the timing of taxation.  Taxation of RSUs is triggered when vesting occurs, which is often on a prorated basis over the course of three or four years.

To regain control over the timing of taxation, some NQDC’s allow for the deferral of RSUs, in addition to cash compensation such as salary and bonuses, raising a number of questions for executives. Do I defer or not? What about vesting? Can I diversify into other investments? How will my decision impact tax liabilities?

This case study provides a methodology for answering these questions, and introduces the Restricted Stock Modeler created by EBS.  Find out the pros and cons of deferring or not deferring your RSUs and how your action impacts your financial situation at retirement.

For a deeper dive into deferring Restricted Stock Units, take a look at EBS’ case study on creating a Restricted Stock Wealth Management Program (RS WMP).  By using an NQDC’s short-term deferral account and the redeferral option, you can transform your annual RSU grants into a vigorous wealth-building strategy.

Restricted Stock Deferral

3. Why Non-Profits Are So Interested in Split-Dollar Life Insurance—Should You Be, Too?

Topic: Split Dollar Life Insurance

Recently, Nonprofit organizations have been bombarded by proposals to implement Split Dollar programs for their highly compensated executives.  Why is this?  Two major factors stand out:  the 2017 Tax Cuts and Jobs Act imposed a new 21% excise tax on compensation paid by a Nonprofit organization in excess of $1 million; and the relative disadvantage of retirement programs for Nonprofit executives structured under Section 457(f).

This White Paper provides a comparison of Section 457(f) and Split Dollar plans, helping highlight the pros and cons of each.  There is a handy matrix that presents a side-by-side summary of the two structures across a number of key features.  The paper is helpful for Nonprofits that are trying to level the recruiting playing field with for profit entities in search of executive talent.

If you’re interested in learning more on this topic, take a look at A Practical Guide To Accounting For Loan Regime Split Dollar Arrangements.  Written by EBS Managing Director Chris Rich (a former E&Y Tax Partner), it provides an overview of the accounting for split dollar arrangements. 

split dollar life insurance executive compensation

That’s all for 2020.  Be sure to follow our Twitter and LinkedIn to stay up to date with the latest content from EBS in 2021.

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Aug 24, 2020

Personal Financial Planning In The Wake Of COVID-19

Time to Re-Focus on Basic Needs

Introduction

In recent years, we have all had to deal with unimagined threats to our physical and financial health. The 2008 financial crisis lead us to focus on prudent asset management; and then, after enjoying 10+ years of extraordinary equity market growth, the COVID-19 Pandemic reminded how fragile our health and the economy can be.

As a result, it may be a good time to re-think the risk management measures we have in place with respect to the financial security of our families, our investment portfolios and the threats to the value of business interests.

Specifically, to reconsider the:

  • adequacy of liquid resources,
  • investment risk tolerance,
  • security of retirement savings,
  • exposure to tax rate risk,
  • adequacy of life, disability and long-term care insurance coverages and,
  • plans in place to protect the value of business interests.

Tax Risks

Tax planning is an important component of risk management with respect to invested assets, retirement savings and any plans for transferring business interests. In a recent opinion piece in the Wall Street Journal, Philip DeMuth, the well-known investment advisor and author of several investment books, pointed out that we are currently living in a “Golden Age of Taxes – the lowest rates we may see for decades.” He goes on to summarize the potential tax increases that we could see in the not too distant future to offset the extraordinary economic stimulus spending of 2020. For example, the scheduled 2026 “sunsetting” of many of the tax benefits of the 2017 Tax Cuts and Jobs Act might be accelerated resulting in increases in individual and corporate tax rates, a reemergence of the AMT, reversal of the doubling of the federal estate tax exemption and an increase in capital gain rates and social security taxes.

He concludes the piece by suggesting, “the smart move for high earners is to play defense.  Contribute to an after-tax 401(k) plan and convert your traditional IRA to a Roth. That way, you pay the taxes at today’s lower rates.”

One More Idea!

One option Mr. DeMuth failed to mention as an effective hedge against future tax increases is a life insurance-based supplemental retirement plan; a concept that has been around for many years, but which is much improved in recent years with the introduction of a wide range of competitive products.

In comparison to life insurance-based plans of years past, a contemporary program can provide competitive pricing, the flexibility to meet specific individual and/or business needs and a greater range of potential benefits. The matrix on the following page provides a comparative analysis of the key characteristics of personal after-tax savings in a mutual fund portfolio versus a contemporary life insurance-based plan.

KEY CHARACTERISTICS
Characteristic Mutual Fund Portfolio Life Insurance-Based Savings Plan
Taxation · After-tax contributions
· Partially tax-deferred accumulation
· Taxable reallocation / rebalancing
· Taxable distributions at blended ordinary / capital gain rates		 “Roth-Like” tax characteristics:
– After-tax contributions
– Tax-deferred accumulation
– Tax-free reallocation / rebalancing
– Non-taxable distributions (if properly structured)
Investment Options · A wide range of individual funds
· Model portfolio options		 · A wide range of individual funds
· Model portfolio options
· Equity index funds with downside protection
Contribution / Distribution Flexibility · Complete flexibility, subject to tax and liquidity considerations · Contribution flexibility, subject to possible underwriting considerations
· Non-taxable withdrawals at any time
Liquidity · Ranges from complete to limited, depending on asset class
· Possibly limited by tax considerations		 · Access to policy cash value at any time through non-taxable withdrawals and loans
Security · Complete control through asset ownership (unless restricted by trust, if used)
· Fully portable		 · Complete control through asset ownership
· Fully portable
Other Features / Benefits – Personal · Transfers of partial interests possible, if desired · Features designed to maximize non-taxable withdrawals while limiting tax risks.
· Optional long-term care benefits
· Significant estate planning flexibility
Other Features / Benefits – Business · Diversification of net worth: An opportunity to build assets outside business · Diversification of net worth: An opportunity to build assets outside of business
· May facilitate business succession planning, and protection of business value
Risks / Issues · Credit risk of investment / asset manager
· Market / interest rate risk
· Net Investment Income surtax (3.8%)
· Risk of adverse changes in tax law		 · Insurance company credit risk
– In some, but not all, cases
· Market / interest rate risk
– Offset by downside protection in equity index products
· Potential impact of underwriting
· Risk of adverse changes in tax law

Comparative IRR:  Life Insurance vs. Mutual Fund Portfolio

The following is a hypothetical analysis of the internal rates of return from an investment in a contemporary variable universal life insurance (VUL) contract versus a portfolio of mutual funds.  The assumptions on which the analysis is based are included below.

Observations:

  • The projected after-tax IRR in the short-term is better with a mutual fund portfolio because of the up-front loads and expenses associated with the VUL contract (see the following page for a comparative analysis of expenses)
  • However, over the long term, the projected after-tax IRR of the VUL contact (with or without consideration of the death benefit) is superior to that for the mutual fund portfolio.
  • A contemporary life insurance-based supplemental retirement plan providing a combination of tax-advantaged savings, protection against future tax increases and cost-effective insurance coverages could be a valuable component to your personal financial plan.

Expense Comparison

The following is an analysis of the projected loads and expenses of the hypothetical VUL contract in comparison to the projected tax cost of the hypothetical mutual fund investment. The comparative advantage is highlighted in green.

Observations:

  • The projected tax costs of the mutual fund portfolio are less than the projected loads and expenses of the VUL contract in the early years; but,
  • When viewed from a long-term perspective, the VUL contract may represent a more cost-efficient savings vehicle, and it provides a number of additional financial planning / risk management benefits.

In Summary

If it is time to re-think your personal financial plans and risk management measures, consider including a contemporary life insurance-based supplemental retirement plan in the mix.  A well designed and properly administered program may represent a valuable addition to your long-term financial plans, providing:

  • Tax-advantaged liquid savings
  • A hedge against future tax increases,
  • A significant death benefit (and optional chronic illness benefits),
  • Protection of the value of business interests and,
  • Professional management, essential to maximizing benefits and minimizing tax risks.

For more information about how EBS could help in this regard, simply contact Chris Rich (617-904-9444 x2) who wrote this blog.

 

P.S.  If you’re a participant in a Deferred Compensation Plan, take a look at Bill MacDonald’s post before this that addresses the ability to take distributions from nonqualified plans.