MKA Executive Planners Blog

Generally speaking, if a trust earns income (dividends, interest, rent, capital gain, etc.) either the trust or some other person is required to pay income tax.  The taxpayer will be either the trust or the grantor, during his or her lifetime.  Although the capital gain rate is the same for individuals and trusts, the income tax brackets for trusts are quite compressed; with the top tax bracket kicking in after taxable income reaches $11,500.  The focus of this article is trust income, exclusive of capital gains (Ordinary Trust Income).

Not too many people realize what a powerful asset protection vehicle life insurance is.  Most people do not understand that the investment inside a life insurance policy grows income tax free and may be accessed at any time with the condition only that the policy does not lapse.  In addition, the investment options (usually a wide variety of mutual funds) are extremely broad, and may be self-directed by the policy owner.  When we think of estate tax benefits we are usually trying to maximize the death benefits.  When we use life insurance as an asset protection strategy, the primary focus should be to maximum cash value accumulation.  This means the smallest death benefit possible so that the maximum investment return on cash value is achieved.

While many, if not most, supplemental retirement agreements (SERPs) and deferred compensation arrangements do not require the participating executive to sign a release in order to receive payment, many employment contracts along with other agreements tied to compensation, employment or severance often do.  If you have a SERP or deferred compensation arrangement or another agreement that has a requirement to sign a release at separation from service you could be caught in a huge tax trap.

When the FDIC examiners are in, you want them to know that you are paying attention to details in order to keep your Bank in compliance.  By paying special attention to the following items on your Annual Bank Owned Life Insurance (BOLI) Review, you should be able to answer their questions regarding your BOLI with ease.  Your BOLI Administrator should be addressing the following key items in your Annual Review to make sure that you remain within OCC 2004-56 guidelines:

For 2012, the federal exemption from all three transfer taxes is $5,120,000 ($10,240,000 for married couples).  The gift and estate tax exemptions are each scheduled to revert to $1,000,000, and the generation skipping transfer tax exemption (GST) is scheduled to revert to $1,390,000 on January 1, 2013.  No one really expects a complete reversion, but it is highly unlikely that that all three types of transfer taxes will be sustained at the current, historically high, levels.  Here are a few reasons why a great deal of wealth will be transferred between January 1 and December 31, 2012, in variety of ways. 

A senior executive or physician earning $250,000 or more at retirement is likely to receive less than 30% of her final pay as a retirement benefit from her employer’s retirement plan and Social Security.   It is not unusual for us to find retirement benefits from employer dollars in the 20 to 25% range of final salary.  At the same time, the average employee’s retirement benefit is likely to be at 50% or more of final salary.

Life Insurance

Deferred Compensation Administration