Estate Planning for the Corporate Executive (Portfolio 808)

Tax Management Portfolio, Estate Planning for the Corporate Executive, No. 808-4th, deals with typical problems arising in wealth transfer planning for corporate executives. 

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Tax Management Portfolio, Estate Planning for Corporate Executives, No. 808-4th, deals with typical problems arising in wealth transfer planning for corporate executives. A lack of liquidity and concentration of investments in the employer's stock (particularly if the employer is a closely held corporation) may present special planning and administration problems for executives and their fiduciaries. In addressing liquidity concerns, this Portfolio discusses the tax consequences of the use of life insurance in general, and the continued viability of split-dollar life insurance arrangements for gift and estate tax purposes.

This Portfolio 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) 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, are discussed.

In addition, planning for corporate executives requires extensive knowledge of planning techniques relating to executive compensation plans. This Portfolio, therefore, examines nonqualified deferred compensation (NQDC) plans and nonqualified stock options. With respect to NQDC, this Portfolio 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. This Portfolio also discusses planning for qualified pension and profit-sharing plans and qualified stock options, but the discussion of those arrangements is limited and further reference should be made to the Compensation Planning Portfolios in the U.S. Income Series, as well as  814 T.M., Estate and Gift Tax Issues for Employee Benefit Plans.

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. In regards to closely held businesses, further reference may be made to 809 T.M., Estate Planning for Owners of Closely Held Business Interests.

This Portfolio may be cited as Drennan, Goldstein, and Erblich, 808-4th T.M., Estate Planning for Corporate Executives.


William A. Drennan, Esq.

William A. Drennan, B.S. in Business Administration, summa cum laude, St. Louis University (1982); J.D., magna cum laude, St. Louis University School of Law (1985); LL.M. in Taxation from Washington University School of Law in St. Louis, Missouri (1997); LL.M. in Intellectual Property from Washington University School of Law in St. Louis, Missouri (2003); member, American Law Institute; fellow, American College of Tax Counsel, and American College of Trust & Estate Counsel; adjunct professor at the Washington University School of Law Graduate Tax Program (1996–2000); Acquisitions Editor of The Insurance Counselor Series published by the Real Property, Trust & Estate Law Section of the American Bar Association; co-author of Taxation and Funding of Nonqualified Deferred Compensation: A Complete Guide to Design and Implementation; passed Missouri CPA exam (1984); author of articles appearing in the Florida Law Review, Tennessee Law Review, Utah Law Review, Oklahoma Law Review, Miami Law Review, Arkansas Law Review, Florida Tax Review, and the Virginia Tax Review.

Michael G. Goldstein, Esq.

Michael G. Goldstein, B.A. Tulane University (1968); J.D. University of Missouri School of Law (1971); LL.M. in Taxation, Washington University School of Law in St. Louis, Missouri (1972); member, American Law Institute, Association for Advanced Life Underwriting; fellow, American Bar Foundation, American College of Tax Counsel and American College of Trust & Estate Counsel; adjunct professor at the Washington University School of Law Graduate Tax Program (1987–1997); chairman of the nationally recognized ALI/ABA Seminar on Uses of Insurance in Estate and Business Planning; Senior Editor of The Insurance Counselor Series published by the Real Property, Trust & Estate Law Section of the American Bar Association; co-author of Taxation and Funding of Nonqualified Deferred Compensation: A Complete Guide to Design and Implementation.

Christopher E. Erblich, Esq.

Christopher E. Erblich, B.S. in Business Administration, summa cum laude, Washington University (1990); J.D., cum laude, St. Louis University School of Law (1994); member of the Partner Board of Husch, Blackwell & Sanders, LLC; former chairman of the firm's St. Louis Tax and Estate Planning practice group; formerly adjunct professor teaching Estate Planning at St. Louis University School of Law; board member of the Estate Planning Council of St. Louis; member of the American Bar Association Taxation Section, Association for Advanced Life Underwriting, Bar Association of Metropolitan St. Louis, and Civic Entrepreneurs Organization; author of “To Bury Federal Transfer Taxes without Further Adieu,” Seton Hall Law Review, Vol. 24, 1994; co-author of “Cash Values Can Reduce Interest Deductions under New Section 264(f),” Taxation Section, American Bar Association (1998), and “Deferring Compensation with Heavenly Help,” Life Insurance Answer Book (1998); passed Missouri CPA exam (1990).

Table of Contents

Portfolio Description
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 Before, During, and Beyond the Age of Uncertainty
Introductory Material
A. Key Statutory Changes Before 2001
B. The Age of Uncertainty Before the 2012 American Taxpayer Relief Act
C. The 2012 Tax Act, the 2017 Tax Act, and Beyond — Increased Focus on Basis Planning
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)
F. No Step-Up (or Step-Down) in Basis for IRD
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
X. Split-Dollar Insurance Arrangements
A. General Description: A Way to Finance a Policy
B. The Structure of Post-September 17, 2003 Split-Dollar Agreements (and Agreements Materially Modified After September 17, 2003)
C. The Structure of Grandfathered Split-Dollar Arrangements — Pre-September 18, 2003 Split-Dollar Agreements that Have Not Been 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

Working Papers
Table of Worksheets
Worksheet 1 Sample Nonqualified Stock Option Agreement
Worksheet 2 Sample Grant of Incentive Stock Option
Worksheet 3 Sample Fiduciary Powers Clauses
Worksheet 4 Table of Selected Inflation-Adjusted Amounts