Description

Estate Planning for the Corporate Executive analyzes typical problems arising in wealth transfer planning for corporate executives. A lack of liquidity and diversification, concentration of investment in the employer's stock (particularly if the employer is a closely held corporation), and the high degree of geographic mobility enjoyed by many executives may present special planning and administration problems for executives and their fiduciaries.

This Portfolio, written by Michael G. Goldstein, Esq., The Newport Group; William A. Drennan, Esq., Southern Illinois University School of Law and Of Counsel, Husch Blackwell & Sanders, LLP; and Christopher E. Erblich, Esq., Husch Blackwell & Sanders, LLP; discusses the relevance of standard estate planning techniques (e.g., inter vivos gifts and trusts, life insurance and life insurance trusts, and the use of the marital gift and estate tax deductions, including special rules for non-U.S. citizen spouses) to the special problems of corporate executives. The drafting of will and trust instruments (particularly fiduciary powers) to provide sufficient flexibility to meet the liquidity needs of the estates and beneficiaries of the executives and to provide for possible changes in domicile are discussed.

In addition, planning for corporate executives requires extensive knowledge of planning techniques relating to executive compensation plans. Estate Planning for the Corporate Executive discusses how §409A and the related regulations and IRS Notices impact the structure of these plans and, in particular, the treatment of death benefits under these plans. In regards to stock options, this Portfolio discusses the SOGRAT patent and the practical impact it will have on estate planning for stock options. Estate Planning for the Corporate Executive also includes a limited discussion of planning for qualified pension and profit-sharing plans and qualified stock options.

In regards to the special concerns of owners of closely held businesses, this Portfolio considers buy-sell agreements and the opportunities to pay an estate tax liability in installments.

Estate Planning for the Corporate Executive allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Estates, Gifts and Trusts Portfolios Library, a comprehensive series containing more than 80 Portfolios, which covers critical transactions in estate, gifts and trusts planning. This highly-regarded resource library offers commentary on a wide range of estate planning topics including: Generation Skipping Tax, Family Limited Partnerships, Charitable Remainder Trusts, Estate Planning for Closely-Held Businesses, Exempt Organizations and Private Foundations, Life Insurance, Valuation, and more.

Table of Contents

Detailed Analysis

I. Introduction

A. Scope of This Portfolio

B. Description of the Corporate Executive

II. Estate Planning Problems of the Executive

Introductory Material

A. Nondiversification of Investments

1. Fluctuations in Value

2. Problems for the Fiduciary

B. Lack of Liquidity

1. Closely Held or Restricted Stock

a. Buy-Sell Agreements

b. Section 303 Redemptions

c. Section 6166 Estate Tax Deferral

2. "Hard Goods" Investments

C. High Mobility

1. Drafting Problems Related to Migration

2. Community Property

3. Impact of Foreign Law

4. Planning for Non-Citizens

III. Estate Planning in the Age of Uncertainty

Introductory Material

A. Key Statutory Changes Before 2001

B. The 2001 Tax Act-Setting the Stage for the Age of Uncertainty

C. The Practical Impact of Uncertainty

IV. Income in Respect of a Decedent

Introductory Material

A. Definition of IRD

B. Timing and Character of IRD

C. Compensation-Related IRD Items

D. Deductions in Respect of a Decedent Under § 691(b)

E. Income Tax Deduction for Estate Tax Attributable to IRD Under § 691(c)

V. Nonqualified Deferred Compensation for Taxable Corporations

A. Basic Description of Nonqualified Deferred Compensation

1. The Benefits of Income Tax Deferral for the Executive

2. The Opportunity to Use NQDC to Fill the "Retirement Gap"

B. The Risks of Nonqualified Deferred Compensation

C. Other Features of NQDC Arrangements

1. Section 409A and Its Impact

a. Applicability of § 409A

b. Tax Consequences of a § 409A Violation

c. An Overview of the § 409A Requirements

(1) Initial Elections to Defer

(2) Subsequent Elections to "Re-Defer"

(3) Permissible Payment Events

(4) The No-Acceleration Rule and the 13 Exceptions

d. 409A Rules and Publicly Traded Corporations

e. Section 409A Provisions and Death Benefits

2. Delayed Deduction for Corporation

3. The Impact of NQDC Benefits on Social Security Benefits

4. FICA Taxes

5. State Source Tax Law

D. Informal Funding for an NQDC Arrangement

E. Tax Consequences of Death Benefits Under an NQDC Arrangement

1. Including the NQDC Death Benefit in the Decedent's Gross Estate

a. Inclusion in the Gross Estate Under § 2039

b. The Amount Included in Decedent's Gross Estate Under § 2039

c. Inclusion in the Employee's Gross Estate Under Other Provisions

2. Attempts to Exclude NQDC Benefit from Decedent's Gross Estate

a. Life Insurance Exclusion

b. Death Benefit Only Plans

c. Split-Dollar Plan or Employee-Owned Life Insurance Arrangement in Connection with NQDC Plan

3. Deducting Value of the Death Benefit from Deceased Employee's Gross Estate

a. The Marital Deduction

(1) The Marital Deduction in General

(2) Marital Deduction and Death Benefits Under an NQDC Plan

b. Charitable Deduction

4. Treatment of Death Benefit Received by Employee's Designated Beneficiary as Income in Respect of a Decedent

a. Income in Respect of a Decedent in General

b. Income Tax Deduction for Estate Tax Paid on IRD

5. Planning for Death Benefits Under an NQDC Plan

a. Pecuniary Bequest

b. Marital Deduction Planning

6. Phantom Stock Plans

VI. Nonqualified Deferred Compensation for Tax-Exempt Organizations

Introductory Material

A. History of § 457

B. Eligible Deferred Compensation Plans

1. Limitations on the Amounts Deferred

2. Additional Requirements

3. Distribution Requirements for Eligible Plans

C. Ineligible Deferred Compensation Plans Under § 457(f) ("Risk of Forfeiture Plans")

1. In General

2. Ways to Create a Substantial Risk of Forfeiture

a. Substantial Services

(1) Elective Deferrals and Extensions.

(2) Being Fired "Without Cause" and Still Receiving Benefits

b. Consulting Services

c. Covenant Not to Compete

d. Other Possible "Substantial" Risks of Forfeiture

e. Risks of Forfeiture That Will Not Be "Substantial"

D. Plans That Are Exempt from § 457(f)

1. Severance Pay Plans

2. Death Benefit Plans

E. Grandfather Rules

VII. Death-Benefit-Only Plans

A. Inclusion of the Death Benefit in the Executive's Gross Estate Under § 2039

B. Inclusion of the Death Benefit Under Section 2038

C. Attempts to Treat Death Benefit as a Taxable Gift

VIII. Qualified Retirement Plans

Introductory Material

A. Description of Plans

1. Defined Benefit Plans

2. Defined Contribution Plans

a. Profit-Sharing Plans

b. Age-Weighted Profit-Sharing Plan

c. Money Purchase Plans

d. Target Benefit Plans

e. Stock Bonus Plans

f. Cash or Deferred Arrangements

g. Employee Stock Ownership Plans (ESOPs)

3. Keogh Plans

B. Estate Taxation of Qualified Plans

C. Estate Planning Considerations

1. Choice of Beneficiary

a. Spouse as Beneficiary

b. Marital Trust as Beneficiary

c. Credit Shelter Trust as Beneficiary

d. Children or Other Descendants as Beneficiary

e. Charity as Beneficiary

2. Payment Options

3. Rollovers

IX. Stock Options

Introductory Material

A. Incentive Stock Options

1. General Rules

2. Effect of Changes in Maximum Tax Rate on Attractiveness of ISOs

a. From the Employee's Perspective

b. From the Employer's Perspective

3. Estate Planning for ISOs

B. Nonqualified Stock Options

1. General Rules

2. Estate Planning for NQSOs

C. GRAT Planning with Stock Options and the SOGRAT Patent

1. GRAT Planning in General

2. SOGRAT Patent

3. Enforcement of the SOGRAT Patent

4. Government Reactions to the SOGRAT and Patented Tax Strategies

a. Congressional Reactions

b. IRS Reactions

5. Practical Impact of the SOGRAT Patent and Tax Strategy Patents

a. Monopoly Power and Attempting to Deviate from the Provisions of the SOGRAT Patent

b. The Client, the Estate Planner, the Firm, and Others Could Be Sued for Infringement

c. Measuring the Risk of Infringing-Damages, Fees, and Costs

d. How Will Clients and Estate Planners React to Patented Tax Strategies?

X. Split-Dollar Insurance Arrangements

A. General Description: A Way to Finance a Policy

B. The Structure of Grandfathered Split-Dollar Arrangements-Pre-9/18/03 Split-Dollar Agreements That Have Not Been Materially Modified After 9/17/03

C. The Structure of Post-September 17, 2003, Split-Dollar Agreements (and Agreements Materially Modified After September 17, 2003)

D. The Use of an Irrevocable Life Insurance Trust ("ILIT")

1. Introduction

2. How the ILIT Works

3. Split-Dollar Arrangement Between an ILIT and a Corporation

E. Gift Tax Consequences

1. Assignment of Existing Policy to ILIT

2. Indirect Gift Equal to Economic Benefit

a. In General

b. Gift Tax Treatment Under the Final Split-Dollar Life Insurance Regulations

3. Annual Gift Tax Exclusion

a. Present Interest Requirement

b. Crummey Powers

F. Estate Tax Consequences

1. Incidents of Ownership

2. Estate Taxation of Collateral Assignment Split-Dollar: Controlling Shareholder

3. Restricted Collateral Assignment

4. Three-Year Transfer Rule

G. Generation-Skipping Transfer Tax Consequences

H. Sarbanes-Oxley-Applicable to Executives at Publicly Traded Corporations

XI. Life Insurance

Introductory Material

A. Estate Taxation of Life Insurance

1. Proceeds Payable to or for the Benefit of the Estate

2. Incidents of Ownership

B. Estate Planning for Life Insurance Policies

1. Gift Tax Issues

a. Value of the Gift

b. Transfer of Incidents of Ownership in a Group-Term Life Insurance Policy

c. Annual Exclusion and the Use of Crummey Provisions

(1) Notice Requirements

(2) Multiple Powerholders

(3) Direct Gifts

d. Choice of New Owner and Beneficiaries

e. Payment of Premiums on Transferred Policies

2. Irrevocable Life Insurance Trusts-Comments on Their Use

3. Transfers Made Within Three Years of Death

4. Survivorship or Second-to-Die Policies

C. Employer-Owned Life Insurance

XII. Special Issues for Owners of Closely Held Businesses

Introductory Material

A. Chapter 14 Estate Freeze Rules

1. Section 2701-Transfers of Interests in Corporations and Partnerships

2. Section 2702-Transfers of Interests in Trusts

3. Section 2703-Disregard of Certain Rights and Restrictions

4. Section 2704-Treatment of Certain Lapsing Rights and Restrictions

B. Buy-Sell Agreements

1. Description of Agreements

2. Common Terms of Agreements

3. Valuing the Transferred Interest

4. Funding

5. Tax Consequences

a. Alternative Minimum Tax

b. Impact of Chapter 14

C. Section 6166-Extended Payment of Estate Tax

1. Eligible Interests

2. Limitation on Tax Eligible for Deferral

3. Making the Election

4. Payments Under the Installment Plan

5. Protective Election

6. Termination of the Election

XIII. Non-U.S. Citizen Spouses

Introductory Material

A. Gifts to Non-U.S. Citizen Spouses

B. Interest in Estate Passing to Decedent's Spouse

1. Disallowance of Marital Deduction

2. When Spouse Becomes a Citizen

C. Qualified Domestic Trust

1. Imposition of Tax

2. Date Tax Is Due

3. Certain Tax Benefits Allowed

4. If Spouse Becomes a Citizen

5. Coordination with Other Code Sections

Working Papers

Table of Worksheets

Other Sources

Worksheet 1 U.S. Patent #6,567,790 (5/20/03), Establishing and Managing Grantor Retained Annuity Trusts Funded by Nonqualified Stock Options (the "SOGRAT Patent")

Worksheet 2 Sample Nonqualified Stock Option Agreement

Worksheet 3 Sample Grant of Incentive Stock Option

Worksheet 4 Sample Fiduciary Powers Clauses

Bibliography

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