Posts Tagged ‘retirement pay’

Experience Has Taught Us how To Attract, Keep Great People

Saturday, April 18th, 2009

Our typical consulting assignment is to put together a wealth transfer plan for a successful business owner.

Invariably, the client brings up two critical and related operational problems: “How do I keep my top executives?” (The headhunters — usually working for a competitor — are always circling.) And “How do I attract new quality people?”

No, the problem is not new. It’s been a problem in the past and, more than likely, will get worse in the future as the bidding war for talented people escalates. What to do?

Almost 20 years ago, after struggling with the problem for about a year, we decided to develop an organized plan to find the answers. We interviewed our few client/owners who did not have the two problems; we also interviewed their key management people.

Then came the hard part: getting permission to interview the key people at clients that were suffering with the problem.

What quickly became clear was that almost 100 percent of the best key people had the soul of an entrepreneur. But for various reasons they did not want to strike our on their own or couldn’t (usually because they could not raise the required capital).

The answer turned out to be simple: “Mimic ownership” — give ‘em the same challenges as an owner and, if successful, most of the rewards.

Additional interviews just kept reconfirming the original answers. The top (non-owner) executives wanted four core benefits of ownership: (1) A piece of the action (a share of company profits); (2) get paid when they are sick or become disabled; (3) receive adequate retirement pay when its time to leave the company; (4) and a death benefit for their family (“Like my piece of the equity if I get hit by a bus” is the way most executives put it.)

Over the years we have created hundreds of contracts (the technical name is a nonqualified deferred compensation agreement; the non-technical name is a golden handcuff agreement) that attract and keep the kind of people you want in your organization.

Let’s take a closer look at each of the four desired benefits:

A piece of the action — Typically, this is a percentage of the yearly profits in excess of specific dollar amounts. Often, the percentage grows as the businessand profits grow.

For example, Sam Eager will get 3 percent of all before-tax profits in excess of $200,000 and up to $300,000; 5 percent from $300,000, to $400,000; and 8 percent over $400,000. Suppose the amount for a particular year is $24,000. Usually, Sam will get about one-third ($8,000) in cash and the balance ($16,000) is deferred.

The deferred portion is invested for Sam’s benefit. When does Sam get the deferred portion and the accumulated earnings on this portion (usually called the side fund)? When he becomes disabled, dies or reaches retirement age (the age is usually set around 58 for younger key employees and in the 65-age range for older key people).

When the key employee becomes entitled to collect the side fund (say it is $500,000), it usually is paid out in equal annual installments (say 10 years) or $50,000 per year plus the additional investment earnings for that year.

Disability — The employee gets paid when sick or disabled — whether for a day or for a lifetime. This benefit is covered by long-term disability insurance. It is essential that “disability” is defined “word for word” in your agreement the same as the word is defined in the disability insurance contract.

Retirement — The side fund (described above) supplements any regular retirement program (like a 401(k) or profit-sharing plan). Typically, the executive is allowed to direct the investment of the side fund, which remains an asset of the employer.

Following are the tax consequences of the arrangement: The side fund earnings are taxable to the employer. When the employee receives a distribution, the company gets a deduction for the exact amount distributed and the employee must report the identical amount as taxable income.

If the employee leaves for any reason-except because of disability, death or retirement-the entire side fund is forfeited by the employee and remains the property of the company. Hence, the name, “Golden handcuffs.”

A set amount of money at death — When an owner dies, the family can sell the business (assuming it is not transferred to the kids). A similar benefit (really a death benefit) should be given to the employee. Of course, this benefit should be insurance funded.

We have been doing these non-qualified plans for years. Done right, they work. Often, when an owner does not have a family member to pass the business to, the side fund serves as the down payment by one or more of the key people to buy the business from the owner.

Two warnings: (1) This article does not attempt to cover every detail and the endless variations for tailoring an agreement that is perfect for your company. Always work with an experienced advisor. Years of experience has proved that the right agreement will make your good people even better. (2) But sadly, there is no agreement we have ever seen that will make a bad employee even a little bit better.

In a way, this getting-and-keeping good people is a frustrating subject. The reason is that we have never been able to develop a cookie cutter solution. Yes, the four core benefits are almost always the same or similar.

—

Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.

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Posted in Corporate Tax, Estate Tax, General Tax Strategies | No Comments »

Find ways to keep top executives happy in order to attract others.

Monday, March 30th, 2009

Most of my consulting time is spent putting together wealth-transfer plans for successful business owners.

Invariably, about half of my clients bring up two critical and related operational problems:

“How do I keep my top executives?” (The headhunters — usually working for a competitor — are always circling.)

And, “How do I attract new quality people?”

The problem is not new, and more than likely, it will get worse in the future as the bidding war for talented people escalates.

What to do?

Almost 20 years ago, after struggling with the problem for about a year, we decided to develop an organized plan to find the answers. We interviewed our few client/owners who did not have the two problems. We also interviewed their key management people.

Then came the hard part: getting permission to interview the key people at clients that were suffering with the problem.

What quickly became clear was that almost 100 percent of the best key people have the soul of an entrepreneur. Yet for various reasons, they do not want to strike out on their own or couldn’t (usually because they can’t raise the required capital).

Solving the top-executive problem turned out to be simple: mimic ownership, give them the same challenges as an owner and, if successful, most of the rewards. Additional interviews just kept reconfirming the original solution.

The top (nonowner) executives wanted four core benefits of ownership:

• A piece of the action — a share of company profits;

• Pay when sick or disabled;

• Adequate retirement pay when it’s time to leave the company;

• Death benefits for their family. (“Like my piece of the equity if I get hit by a bus,” or similar words, is the way most executives put it.) Over the years we have created hundreds of contracts (the technical name is a nonqualified deferred compensation agreement; the nontechnical name is a golden handcuff agreement) that attract and keep the kind of key people you want in your organization.

Let’s take a closer look at each of the four desired benefits:

• A piece-of-the-action plan — Typically, this is a percentage of the profits in excess of a specific dollar amount. Often, the percentage grows as the business and profits grow.

For example, Sam Topgun will get 4 percent of all before-tax profits in excess of $200,000 per year. Profits in excess of $400,000 will be entitled to 6 percent. Say the amount earned under the plan for year one (or any subsequent year is $21,000).

Usually, Sam will get about one-third ($7,000) in cash and the balance ($14,000) is deferred. The deferred portion is invested for Sam’s benefit. When does Sam get the deferred portion and the accumulated earnings (usually called the side fund)? When the employee becomes disabled, dies or reaches retirement age (the age is usually set around 58 for younger key employees and in the 65-age range for older key people). When the key employee becomes entitled to collect the side fund (say it is $500,000), it usually is paid out in equal annual installments (say 10 years) or $50,000 per year plus the additional investment earnings for that year.

• Disability — The employee gets paid when sick or disabled, whether for a day or for a lifetime. This benefit is covered by long-term disability insurance. It is essential that “disability” is defined word-for-word in your agreement the same as it is defined in the disability insurance contract.

• Retirement — The side fund (described previously) supplements any regular retirement program (like a 401(k) or profit-sharing plan).

Typically, the executive is allowed to direct the investment of the side fund, which remains an asset of the employer. The tax consequences of the arrangement follow: The side-fund earnings are taxable to the employer. When the employee receives a distribution, the company gets a deduction for the exact amount distributed and the employee must report the identical amount as taxable income.

If the employee leaves for any reason — except because of disability, death or retirement — the entire side fund is forfeited by the employee and remains the property of the company. Hence, the name, “golden handcuffs.”

• Set amount of money at death — When an owner dies, the family can sell the business (assuming it is not transferred to the kids). A similar benefit (really a death benefit) should be given to the employee. Of course, this benefit should be insurance funded. We have been doing these nonqualified plan for years. Done right, they work. Often, when an owner does not have a family member to pass the business to, the side fund serves as the down payment by one or more of the key people to buy the business from the owner.

Two warnings:

This article does not attempt to cover every detail and the endless variations for tailoring an agreement that is perfect for your company. Always — and we mean always — work with a professional advisor. Years of experience have proved that the right agreement will make your good people even better.

Also, and sadly, there is no agreement we have ever seen that will make a bad employee even a little bit better. In a way, this topic of getting and keeping good people is frustrating. This is why we have never been able to develop a cookie-cutter solution. Yes, the four core benefits are almost always the same or similar. But the bells, whistles and unique requirements of each situation make it impossible to write a complete report — much less a book — on the subject.

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Posted in Corporate Tax, Estate Tax | No Comments »

Gaining wealth is easy when compared with human aspect of tax game

Saturday, March 28th, 2009

Recently, I read an article titled What Makes for Success? by Kemmons Wilson, the founder of Holiday Inn. He said, “It is great to attain wealth, but money is really just one way — and hardly the best way — to keep score.”

Interesting quote, huh?

Most readers of this column call me with tax problems because they have attained wealth (no doubt they have and do keep score with money) and they don’t want to share that wealth with the IRS — perfectly normal. Yet, it’s amazing. Once the reader realizes that we really do know how to pass their wealth — all of it and intact — to their family, the conversation turns to other ways that they might keep score. Sure, they are delighted to find there are legal ways to totally win the estate tax game. But they readily admit that they don’t know how to deal with the other problems (other ways to keep score).

The other problems fall into the general category of little kids, little problems; big kids, big problems.

Stuff like which of my kids should run the business? How do I treat the kids fairly? What about the non-business kids?

What happens if one (or more) of my kids get divorced? How do I take care of my wife (the second one who is 15 years — or more — younger than the caller)? The callers tell me about family problems, business problems and/or assorted personal problems. To me every word is important, even though I’ve listened to so many tales of woe before. But, although similar, each problem has its own peculiar twists and turns.

Let’s face it — stuff happens. After years of solving wealth transfer problems, business succession (usually the business is at center stage) and estate planning problems, experience has taught me that solving only the money problems can never yield a perfect plan.

The human stuff — your spouse and kids support your plan — must be solved too.

What about your son-in-law or daughter-in-law? I know. It sounds like cornball. But if you really want to win the game of life after you have won the money game (really the easy part), you must attempt to solve the human part, the emotional stuff.

Here’s my suggestion to start the process. Make two lists: the money-problem list and the human-problem list.

Solve the money problems first (usually you are home free if you solve these three money problems:

• maintain your lifestyle — and your spouse’s — for as long as you live;

• transfer your business to the business kids — tax-free; and

• kill the estate tax.

Then, it’s easier to tackle the human-problem list. Interesting, many times solving the money problems also solve some (often all) of the human problems.

Finally, you must work with experienced professionals who know how to solve both problems: the money problems and the emotional human problems that come with accumulating wealth and trying to pass it on.

One more thing: Each piece of your plan must be part of a single comprehensive and integrated plan, all implemented at the same time. Piecemeal planning, based on my 50 years of experience, is a disaster that not only enriches the IRS, but fails to satisfy the normal human desires of a typical family and its business.

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Posted in Estate Tax, Family Tax Issues, General Tax Strategies | No Comments »

Want to keep top execs?

Friday, March 27th, 2009

I spend most of my consulting time putting together wealth transfer plans for successful business owners. About half of my clients bring up two critical and related operational problems:

• “How do I keep my top executives?” (The headhunters — usually working for a competitor — are always circling.)

• “How do I attract new quality people?”

The problem is not new. It’s been a problem in the past and likely will get worse in the future as the bidding war for talented people escalates.

What to do?

Almost 20 years ago, after struggling with the problem for about a year, we decided to develop an organized plan to find the answers. We interviewed our few business-owning clients who did not have the two problems; we also interviewed their key management people. Then came the hard part: getting permission to interview the key people of clients who were suffering with the problem.

What quickly became clear was that almost 100 percent of the best key people had the souls of entrepreneurs. But for various reasons they did not want to strike out on their own or couldn’t — usually because they couldn’t raise the required capital.

Solving the top-executive problem turned out to be simple.

Mimic ownership — give ‘em the same challenges as an owner and, if they’re successful, most of the rewards.

Additional interviews just kept confirming the original solution.

The top non-owner executives wanted four core benefits of ownership:

• A piece of the action (a share of company profits).

• Getting paid when they were sick or became disabled.

• Receiving adequate retirement pay when it was time to leave the company.

• Death benefits for their family. Most executives put it this way, or in similar words: “Like my piece of the equity if I get hit by a bus.”

Over the years we have created hundreds of contracts — the technical name is a nonqualified deferred compensation agreement; the nontechnical name is a golden handcuff agreement — that attract and keep the kind of key people you want in your organization.

Let’s take a closer look at each of the four desired benefits:

A piece-of-the-action plan

Typically, this is a percentage of the profits in excess of a specific dollar amount. Often, the percentage grows as the business and profits grow.

For example, Sam Topgun will get 4 percent of all before-tax profits in excess of $200,000 per year. Profits in excess of $400,000 will be entitled to 6 percent.

Say the amount earned under the plan for year one, or any subsequent year, is $21,000. Usually, Sam will get about one-third ($7,000) in cash, and the balance ($14,000) is deferred. The deferred portion is invested for Sam’s benefit.

When does Sam get the deferred portion and the accumulated earnings (usually called the side fund)? When he becomes disabled, dies or reaches retirement age. The age is usually set around 58 for younger key employees and around 65 for older key people.

When the key employee becomes entitled to collect the side fund, it usually is paid out in equal annual installments. If the side fund is $500,000 and paid out over 10 years, the employee gets $50,000 per year plus the additional investment earnings for that year.

Disability

The employee gets paid when sick or disabled — whether for a day or for a lifetime. This benefit is covered by long-term disability insurance.

It is essential that disability is defined word for word in your agreement — the same as it is defined in the disability insurance contract.

Retirement

The side fund (described above) supplements any regular retirement program, like a 401(k) or profit-sharing plan.

Typically, the executive is allowed to direct the investment of the side fund, which remains an asset of the employer.

The tax consequences of the arrangement:

• The side-fund earnings are taxable to the employer.

• When the employee receives a distribution, the company gets a deduction for the exact amount distributed and the employee must report the identical amount as taxable income.

If the employee leaves for any reason — except for disability, death or retirement — the entire side fund is forfeited by the employee and remains the property of the company.

Hence, the name “golden handcuffs.”

A set amount of money at death

When an owner dies, the family can sell the business — assuming it is not transferred to the kids. A similar benefit, really a death benefit, should be given to the employee. Of course, this benefit should be insurance-funded.

We have been doing these nonqualified plans for years.

Done right, they work. Often, when an owner does not have a family member to pass the business to, the side fund serves as the down payment by one or more of the key people to buy the business from the owner.

Two warnings:

• This column does not attempt to cover every detail and the endless variations for tailoring an agreement that is perfect for your company. Always, and we mean always, work with an experienced adviser. Years of experience have proved that the right agreement will make your good people even better.

• Sadly, we have never seen an agreement that will make a bad employee even a little bit better.

In a way, getting and keeping good people is a frustrating subject. The reason: We have never been able to develop a cookie-cutter solution.

Yes, the four core benefits are almost always the same or similar. But the bells, whistles and unique requirements of each situation make it impossible to write a complete report — much less a book — on the subject.

Tags: , , , , , , , , , , , ,
Posted in Corporate Tax, General Tax Talk | No Comments »