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Proactive planning for business owner clients

Your business owner clients have unique estate planning needs, especially when it comes to business continuity and key employee retention. Using a trust can help provide control and ensure that their business assets are transferred to their chosen beneficiaries.

Key employee retention

When it comes to retaining key employees, consider a strategy using life insurance and trusts to informally fund deferred compensation benefits for key executives. Here’s how this plan can work:

For C-corporations, so-called rabbi trusts allow the key executive to know that the corporation has set aside specific assets for them.
Under IRS rules, the assets in the rabbi trust must remain subject to claims by the corporation’s creditors.
If an employer funds a trust to pay deferred compensation that is not subject to the claims of creditors, the employer’s contributions are immediately taxable to the key executive.

Meet Tim and Mary

Tim and Mary own a successful C-corporation that provides consulting services to small and midsize businesses. They are concerned about retaining several of their best consultants and have decided that they would like to offer a deferred compensation benefit that would vest over the next five to 10 years. Tim and Mary would also like to have some key person coverage on these consultants.

Ready to help clients protect their legacy with trust-owned life insurance?
Email us at TOLI@LFG.com or call us at 800-832-5372.

Any tax information contained in this communication, while presented in good faith, is general in nature and is not intended to be a rendering of legal, accounting or tax advice and should not be used without the advice and guidance of a professional Tax Advisor. Furthermore, the information contained herein may not be applicable or suitable to an individual’s specific circumstances or needs and may require consideration of other matters.

Important information

This material is intended for informational and educational purposes only. It is not intended to be investment, legal, or tax advice. Work with your financial, legal and tax professionals for guidance.

Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives and/or insurance agents do not provide tax, accounting or legal advice. Please consult an independent professional as to any tax, accounting or legal statements made herein.

Affiliates include broker-dealer/distributor Lincoln Financial Distributors, Inc., Radnor, PA, and insurance company affiliates The Lincoln National Life Insurance Company, Fort Wayne, IN, and Lincoln Life & Annuity Company of New York, Syracuse, NY.

LCN-6060122-103023
5/24 Z08
Order code: LIF-TOLID-IDE001

For financial professional use only. Not for use with the public.

Proactive planning for business owner clients

Key employee retention

When it comes to retaining key employees, consider a strategy using life insurance and
trusts to informally fund deferred compensation benefits for key executives. Here’s how
this plan can work:

For C-corporations, so-called rabbi trusts allow the key executive to know that the corporation has set aside specific assets for them.
Under IRS rules, the assets in the rabbi trust must remain subject to claims by the corporation’s creditors.
If an employer funds a trust to pay deferred compensation that is not subject to the claims of creditors, the employer’s contributions are immediately taxable to the key executive.

Image of older, happy couple, embracing.

Meet Tim and Mary

Ready to help clients protect their legacy with trust-owned life insurance? Email us at TOLI@LFG.com or call us at 800-832-5372.

Important information

For financial professional use only. Not for use with the public.

LCN-6060122-103023
5/24 Z08
Order code: LIF-TOLID-IDE001

Proactive planning for business owner clients

Key employee retention

When it comes to retaining key employees, consider a strategy using life insurance and trusts to informally fund deferred compensation benefits for key executives. Here’s how this plan can work:

For C-corporations, so-called rabbi trusts allow the key executive to know that the corporation has set aside specific assets for them.
Under IRS rules, the assets in the rabbi trust must remain subject to claims by the corporation’s creditors.
If an employer funds a trust to pay deferred compensation that is not subject to the claims of creditors, the employer’s contributions are immediately taxable to the key executive.

Meet Tim and Mary

Ready to help clients protect their legacy with trust-owned life insurance? Email us at TOLI@LFG.com or call us at 800-832-5372.

Important information

For financial professional use only. Not for use with the public.

LCN-6060122-103023
5/24 Z08
Order code: LIF-TOLID-IDE001

Here are some things to consider:

The C-corporation pays income taxes each year on the investment income received by the trust.
The tax-free inside buildup of a life insurance contract can be attractive for employees accustomed to moving money around inside a 401(k) plan and who may prefer the similar investment options offered by a variable life insurance contract. However, if the goal of the deferred compensation arrangement is a targeted nonqualified defined benefit (e.g., $10,000 a month for 20 years), an indexed universal life (IUL) contract may work better.
Corporations with a limited number of deferred compensation plan participants will often purchase separate life insurance contracts on each participant inside the trust. Since the deferred compensation plan typically focuses on the policy’s cash value, the excess of the death benefit over the cash value is essentially key man coverage on that executive. In this approach, the employer may access policy cash values to fund the actual deferred compensation plan benefits.
Corporations with a larger number of deferred compensation plan participants may use aggregate funding for the plan in which a number of policies will be purchased on younger, presumably healthy employees because the cash values of those contracts will grow faster than a similar contract on an older plan participant.
Since all these contracts are owned by the employer, they will need to comply with the eligibility, notice and consent rules of IRC §101(j).
The owners of S-corporations, partnerships and LLCs prefer to use bonuses to retain executives because the business owners benefit from the tax deduction.

Meet Tim and Mary

Tim and Mary’s financial professional recommends that they purchase a life insurance contract on each of the consultants inside a rabbi trust to fund both the key man coverage and a deferred compensation benefit. Tim and Mary think that the business can contribute $20,000 a year to the plan for their three key consultants. Their financial professional also recommends that they work with their attorney to draft the deferred compensation plan and trust to make sure they are complying with tax and legal requirements.

Proactive planning for business owner clients

Key employee retention

When it comes to retaining key employees, consider a strategy using life insurance and trusts to informally fund deferred compensation benefits for key executives. Here’s how this plan can work:

For C-corporations, so-called rabbi trusts allow the key executive to know that the corporation has set aside specific assets for them.

Under IRS rules, the assets in the rabbi trust must remain subject to claims by the corporation’s creditors.
If an employer funds a trust to pay deferred compensation that is not subject to the claims of creditors, the employer’s contributions are immediately taxable to the key executive.