There must be a separation of tax brackets or entities in order for the full benefits to be realized. One also needs a life insurance contract which can defer the income for the owner and/or employee. The life insurance contract is the vehicle which makes this possible.
Additional appropriate questions
- Is it more important for the business to get their money back or to have whatever it spends as premium as a write-off?
- Does the business want any type of vesting schedule or does the employee have to be completely vested to receive the benefit (golden handcuffs)?
- Is the business or participant most interested in potential retirement income?
- Are there any real health challenges in the proposed participants that they are aware of?
- Does the business have any specific agreements or contracts it wants to fulfill with these contracts? (Buy Sell Succession, Key Man, Deferred compensation, Estate Liquidity for owners)
What will the Business Accomplish by establishing a plan?
- Defers income for a owner or key employee.
- Differentiation from other businesses that have not made any plans. This makes it more attractive to employees as well.
- Potential Golden Handcuffs
- Turning lesser taxed business dollars to lightly or tax-free dollars to the participants in the form of benefits at their higher tax bracket personally
- Potential no out of pocket costs to the business
- Opportunity to leverage the corporate dollar to get a substantial write-off
- A method of insuring that agreements and obligations will be met.