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Restrictive Executive Bonus Agreements

Restrictive Executive Bonus Agreements. Beyond The Basics. [ Presented by: [Joe Sample], [Designations per field stationery guidelines] [Company Approved Title] [Agency Name] [The Prudential Insurance Company of America] [1234 Main Street, Suite 1, Floor 10] [Anywhere], [ST] [12345]

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Restrictive Executive Bonus Agreements

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  1. Restrictive Executive Bonus Agreements • Beyond The Basics [ Presented by: [Joe Sample], [Designations per field stationery guidelines] [Company Approved Title] [Agency Name] [The Prudential Insurance Company of America] [1234 Main Street, Suite 1, Floor 10] [Anywhere], [ST] [12345] [in required states] [<ST> Insurance License Number <1234567890>] [Phone] [123-123-1234] Fax [123-123-1245] [joe.sample@prudential.com]] Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities. Not for Consumer Use. 0239482-00001-00 Ed. 02/2013 Exp. 08/15/2014

  2. Important Information This material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that it does not constitute legal, accounting or tax advice. Such services should be provided by the client’s own legal, accounting or tax advisors. Accordingly, information in this document cannot be used for purposes of avoiding penalties under the Internal Revenue Code. Not for Consumer Use.

  3. Important Information Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates. All are Prudential financial companies located in Newark, NJ, and each is solely responsible for its own financial condition and contractual obligations. Life insurance policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. A financial professional can provide your clients with costs and complete details. The availability of other products and services varies by carrier and state. Securities and Insurance Products: Not Insured by FDIC or Any Federal Government Agency.May Lose Value. Not a Deposit of or Guaranteed by Any Bank or Bank Affiliate. Not for Consumer Use.

  4. “Traditional” Executive Bonus Plan Insurance Company Business pays premiums on an insurance policy owned by the key executive Tax Deductible Premiums Cash Value Access Death Benefit Taxable Compensation Key Executive Beneficiary Not for Consumer Use.

  5. Solution: The REBA • REBA – Restrictive Executive Bonus Arrangement • Similar to a traditional bonus plan • But, provides “golden handcuffs” • Employment agreement • Restrictive endorsement • A picture is worth a thousand words … Not for Consumer Use.

  6. Step 1: Employment Agreement • Legal counsel modifies or drafts an employment agreement whereby the employer agrees to pay premium bonuses. • Executive makes an unsecured promise to continue in the company’s employment for a specified period of time. The agreement may also include a repayment provision of some or all of the bonus payments if the executive does not meet the terms of his or her agreement. 1. Employment Key Executive Business Agreement Not for Consumer Use.

  7. 3. Taxable Income IRS 4. Tax Deduction Step 2: Life Insurance Purchase 1. Employment 2. Premium Business Insurance Company Key Executive • The business pays premiums to the insurance company for an insurance policy owned by the executive. • Payment of the annual premium is generally deductible by the employer (subject to reasonable compensation rules). • The bonus amounts are included in the executive’s taxable income. Agreement Not for Consumer Use.

  8. 3. Taxable Income 4. Tax Deduction IRS Step 3: The Restrictive Endorsement 1. Employment 2. Premium Business Insurance Company Key Executive • At purchase, a restrictive endorsement is placed on the contract by the employer and filed with the insurance carrier. This endorsement restricts the executive’s access to the policy. • The executive cannot surrender the policy, take loans or withdrawals, assign the policy as collateral security, or change ownership without the employer’s consent. While the endorsement is in place, the executive retains only the right to name and change the beneficiary of the death benefit proceeds. Agreement Restrictive Endorsement 5. Policy Endorsement Not for Consumer Use.

  9. What Are the Planning Risks ? • IRS: Current Tax Deduction Denied • Employer viewed as benefiting from the contract • Solution: Proper Structure & Separation • Use legal counsel to structure and draft the agreements • The executive’s repayment obligation should remain an unsecured promise. • Do not give the employer reimbursement rights in the policy. • Separate the repayment obligation in the employment contract from the restrictive endorsement on the policy. Not for Consumer Use.

  10. What Are the Planning Risks ? • DOL: Classified as a funded ERISA pension plan • Subject to all of ERISA’s burdensome Title 1 requirements • Solution: Proper Structure … Not a Retirement Plan • Use legal counsel to structure and draft the agreements • Sell it as a welfare benefit arrangement that has limited ERISA requirements • Place emphasis on the death benefit • Avoid tying all the repayment obligations to retirement age • Remove the restrictive endorsement prior to retirement • Individualize the structure and details for each executive Not for Consumer Use.

  11. Where’s the Sale? • Use the Hot Buttons • Employer • “The Bottom Line” • Complexity Anxiety • Executive • Security • Portability Not for Consumer Use.

  12. Where’s the Sale? • Choose the Right Business • Choose the Right People • Tax bracket considerations • Entity considerations • C Corporations • Sole Proprietorships • S Corporations • Partnerships, Limited Liability Companies (LLCs) • The right individuals • Owners • Owner/employees • Employees Not for Consumer Use.

  13. Where’s the Sale? • The Executive Benefit Market • Current income tax deduction is needed • Smaller business dissatisfied with qualified plans • Closely held corporations • Group term carve-out plans • Executive benefit security Not for Consumer Use.

  14. Where’s the Sale? • Exit Planning • Cross purchase buy-sell agreements • Wait-and-see buy-sell agreements • Corporate redemptions • Stay bonus Not for Consumer Use.

  15. [Thank You !! • Need more information? • Click on the ATTACHMENTS tab for more material • Click the Tools & Help icon • Contact the Life Sales Desk: lifesalesdesk@prudential.com - or – • Visit our website: www.pruxpress.com • THANK YOU FOR JOINING US! ] Not for Consumer Use.

  16. QUESTIONS? Not for Consumer Use.

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