MBK Beat Ep #12 | Case Example Executive Endorsement Split $ Plans for Community Bank Executives

On the 2nd edition of the Case Study Example series, we break down in further detail the Executive Split-Dollar Plan for Community Banks. You can find more info to introduce the approach in episode 10. We break down the issues facing Community Banks, and how they struggle to provide competitive packages for high-level talent. We walk through the typical arrangement and the problems with non-qualified deferred compensation and go over the incentives that are possible with this plan. Watch and listen as Mark walks the viewer through every step of the way, breaking down a real-life case study example, and demonstrates exactly why this program is perfect for your Community Bank Board and C-Level recruiting and retention.

Transcript

This is the MBK beat with Marczewski MBK and Associates Inc. Your place for finding all you need to know about life insurance and how you can get more of your money. Recorded live here in Buffalo, New York. It's time for the MBK beat with Mark Krushchev. Hello, folks, and welcome back to the Mbeki with Marczewski. It's the second episode of the Case Example's series, Twelfth Total Episode. It's been it's been really informative. I've had a great time learning with Mark the the the expert here. I'm going to turn it right over to Mark today, because he's the expert. So why don't you set the stage for us? Who are we talking to today? And what plan are we going to break down? Because I'm going to go a little bit more detail here and give you a nice John Doe example sort of thing here. So what are we looking at today, Mark?

Good morning, Jeremy. Go Bill's Gobeil. That's right. Football season is upon us on. Our audience today really are. The board board's chairman of the board's presidents of. Smaller community, privately held community based community, commercial banks. You know, in the banking world, you've got publicly held banks, a real large ones. Then you've got, you know, the key banks of the world, he fits the profile. Then you get the Bank of America and. You know, Citibank and those banks and the mega banks, those are all publicly traded banks and their executive compensation packages are a combination of salary bonus stock options and what's known as nonqualified deferred compensation plans. In the nonqualified, deferred compensation plans are really there to make up for the limitations on qualified plan benefits. But in community banks, it's a different ballgame, especially if you're privately held community banks. They can't they can't offer stock options. At the end of the day. Well, regardless of the size of your institution, if you're a community based bank, you've got two issues related financial and compensation issues. How do you recruit and retain C-level executives, top level executives, and how do you provide appropriate executive benefit packages, especially retirement benefit packages when you're you know, when you have limitations on qualified plans for those people? Community banks, typically, they're providing fabulous salary compensation, and you'll see a number of them offering non-qualified benefits. Typically nonqualified deferred compensation. The problem with not for compensation is you can't invest the benefit until they retire.

So it's not going to keep people there per se, as opposed to stock options. And he may offer they're going to invest over time. So there's a huge incentive with public banks. For an executive to go there because, you know, I'm going to get something, even if I don't stay the full length of time, I can't do that in a community, privately held community big. So how can how can a community bank offer something different? There is a recruiting and retention tool, not just something that's going to show up if you're there when you retire. All right. Well, Endorsement's Patel is an answer to that quandary. Unlike nonqualified deferred compensation, which is typically funded with what's known as corporate owned life insurance or Cholly Seelie, endorsement's per dollar is a viable planning tool for the community bank. Space because it will provide vesting and it's not subject to F.S.B liability rules, which is a big issue within the commercial banking. And it meets regulatory banking regulations under something known as regulation. Oh, so it's permissible. You can provide this to an executive. It passes muster on a regulation. It doesn't have a fancy liability issues which you do have with the word cap. And you could provide vesting. So how does it work? Well, first of all, what you do is you provide the bank selects a group of employees.

They want to cover a discretionary basis, just like they can with other non-qualified plans. There are there are some limitations. There are topia rules. And you know who fits into this. But as a general rule, you can pick the group you want on a discretionary basis within some limitations. Number two, the bank that purchases permanent cash value life insurance policies on these executives based on a benefit level they're trying to fund, and then they execute split dollar agreements, which will typically outline, you know, who gets what if or when they leave, when they leave or if they die. It was all pursued to internal revenue regulations that have been around for a long time that were recently updated, well updated some years ago. But they're you know, they're we're not guessing. These are things we can do. Well, additionally, these plans, because of the way they're structured and funded, the community bank, if they choose to confront a supplemental nonqualified deferred cap that has no vesting until you retire and you can use the same monies from the same contract to fund it without. In other words, you can get a two for one of those lists without having to fund separate plans. In other words, write to checks by writing one, check the bank fund of this retirement benefit with vesting. And if they choose to set up a deferred plan that can also be funded with some of the money out of here without hurting the original benefit.

Pretty neat trick, OK. What are you what ends up happening for the executive, is the executives going to have a vested retirement benefit? Watch if he stays 10 years. He's got a vast retirement benefits locked in. In the meantime, there's a life insurance, death benefit, income tax free to his personal state beneficiaries. It was typically a substantial seven figure figure benefit. And the only downside qualifier is under SPUT regulations. He has to pick up some imputed what's called imputed income for tax purposes. And it's a minor number. We'll show you what those numbers look like. Very minor number for the community bank. They've got a legitimate, you know, retention tool to recruit to all the cash. Building up in these policies is treated as a bank asset. It either a death or retirement, they will get back all their money and sometimes money plus interest. And it's very the regulatory oversight is minimal administration, very simple. It's a win win situation. So let's go through an example, if I can. Ok. This is not email a 45. He's healthy and we will. And in this case, the banks chosen to fund a kind of a defined contribution basis, one hundred thousand dollars a year into this contract for 10 years. It's all done in 10 years.

And that would be coming from the employer.

Yeah, this is the bank. The bank is writing these checks to the insurance carrier. And this is going to this is going to. It's a lot harder to do right handed here. But that's going to provide a two million dollar excess of two million dollar death benefit in order to split dollar agreement. What happens is the bank is of always guaranteed that they will receive all their money back at a death if it happens before retirement. The balance of the death benefit is paid to the state beneficiaries, so, for example, at the end of 10 years, the death benefits grow to three point one million. They've put a million in from an executive. And I die in year 10. They're going to get back. Are a million dollars. And I'm going to I feel is going to get two million dollars. So. That's kind of the front end, but what happens as time goes by now, let's go out another 10 years here and see what happens at retirement at sixty five. You have a country that includes 64, if we go back here, the. The contract is over two million dollars of cash in it. We're basing this on roughly a six percent interest projection. And at 65, we've got over two million dollars of cash on there.

What's going to happen if the bank decides to do nothing else? They're going to get their million dollars back plus out of the contract. We're going to take a loan out of the contract and we're going to reimburse them. And that's a taxable event to the executive. We're going to reimburse the tax cost to the executive. So there's no he's not having to foot the bill out of his personal assets. So become a business tax neutral to the executive. But the bank gets a million dollars back and we give the executive enough money back to cover the tax liability. But after that. Because of the way this country works and there's still almost a million dollars in here, but because of the way the the distribution provisions work, we're able to pay over one hundred and forty thousand dollars a year tax free for life. To the executive, if we assume we earned six percent of these contracts that we have is over seven and a half percent, we don't show that. We can't show that. And there's some enhancement provisions we can't show either. So these are very conservative projections. So there's still a death benefit, by the way. You know, it's going to go down.

But all the way through here, even if you get out to age 94, there is a still million dollars, a death benefit after we've distributed all this money in the banks, got all their money back, if they choose to, they can take that million dollars and file a supplemental benefit at the retirement. I mentioned something about the tax cuts to the executive. What happens? What's that all about? Well, based on internal revenue rulings, which were updated 10, 15 years ago, they have there's an economic benefit even if the bank is paying for this. There's an economic benefit to the to the executive. Well, what is the insurance benefit? What's it worth? Well, it's worth the term cost. So based on Pacific lives, yearly renewable term rates of that hundred thousand dollars. The death benefit return portion has to be reported to the executive. As you can see, he has to pick this up. Is imputed income in the actual tax due? Ok. The amount payable is peanuts. It's hundreds of dollars. These are my rules, these are the government's rules. So it's almost the law if it's not even a rounding error, it's a small number. So that pretty much covers it. No. Jeremy, do you have any questions?

Yeah, I have a couple of quick little questions as I sort of attempt to follow or follow you. And that's again,

Didn't I make myself clear? Oh, absolutely. I make myself clear.

You just you see you hear these things. And this is obviously why we wanted to continue to record these podcasts, because we feel that it could be extremely beneficial to those out there. And you can't exactly communicate these things in greater detail over a website or quick video. So a few questions here. You know, you mentioned the 10 year. And that that that vesting and some somewhat of that like retention. I wanted to hear a little bit more on that, because I see here, obviously this is that 10 years where they make that happen. And then so in the event that that executive were to leave at that point, they would. Would they still be entitled if they have that 10 years invested, if they've put that 10 year time in?

That's a good, good question. At the end of 10 years, this can become part of the agreement at the end of 10 years. You can rest the employee so that this contract stays in force until such time is the cash is sufficient to reimburse them and then provide the retirement benefit so we can keep this in place. There's no more costly to the executive. The company just keeps it until retirement. And then pursuant to the agreement you put this in, the agreement we will keep after 10 years, we will keep the policy in force and hand it over to you at 65. It's kind of like let's assume you worked for the state. And after 20 years, you're fully rested, but you're only 45, you can't get your money until 55, well, you're still going to get your money, but they're holding on to it until their day. Ok.

Yeah. Yeah, that's really helpful. I would I would imagine the question that would help with sort of being able to recruit if you really, you know, you had that high profile potential employee that you wanted. Obviously, we talk about being able to recruit. That seems like a nice piece, especially for someone younger, maybe 40 to 45 that might not think of this stuff already. They might not be thinking down the line at that point, in my opinion, it would seem. And then another question I had was just regarding the a little bit more about the process of the the selection of the group and what that looks like in the real world, smaller groups, larger groups. Does it depend?

Well, in the very section of the Internal Revenue Code, they define highly compensated employees. And, you know, if you think you're highly compensated, essentially you are in. Those are management executive level, you know, types of people. And if for some, you know, those are the people that are eligible for these plans and. You know, the deferred compensation world under under IRS regulations, you're creating what's known as a top hat group, and then there's certain regulations you have to abide by. Well, just dollars. That doesn't happen. It's put out fairly discretionary, but we still have, you know, establish agreements to define everything. So as opposed to having to deal with federal regulations, you're dealing with, you know, Iris. Requirements that you would need. You know, you do need to establish a split dollar agreement in there that defines how this thing is administered and regulated. Melior Real issue is the tax issue for the imputed income

And that tax issue for the imputed income. Is that the figure that we were looking at?

Yeah, the highlighted figure is the imputed income and the taxes, which you actually play, in other words. In that example, if there was a seventeen hundred dollar imputed income, that's what I get out of ten ninety nine for my employer. But I didn't get the money. It's considered miscellaneous income. So I have to pay tax on that. It's phantom income and it is phantom income. I got the benefit. I didn't get the cash, but that's what that's what it's worth. So I have to pay tax on that number. And if it's you know, if I in the 35 percent bracket, it's a couple of hundred bucks.

That's not not too significant, you know.

You know, for three or four hundred dollars, my film films getting two million dollars a life insurance. I can't sell a term policy that cheaply. Right. Right. Those are the regulations and that and and they say, you know, what's the one year term rate this company charges for a term policy? That's what it is. And you're not even paying there. You're just paying your tax liability on that number.

It seems like it would be a no brainer if anybody were to be able to sit down and now this this sort of John Doe example, would this be something that you would work with someone and be able to just sit them down and plug their sort of figures into what they would be able to look at this similar chart?

Absolutely. You know, there's there's two ways to skin a cat. One is we want to put so much money away for this executive of this group of executives or we're trying to get to a retirement number based, you know. So you reverse engineer the the premium dollars based on what you know you're trying to. Target is a benefit

In this being sort of a baseline example, how much variation do you see with these types of plans? Is it sort of is it easy for you to to take an look at someone's pretty simply and know that this is right for them or this might not be?

Well, we're we're targeting really closely held banks. They are. This is really something that fits that profile. Yeah, this is very for a publicly traded bank. They're going to you know, they're spending. There's only so much money they're going to spend on the executive of their money's going to stock options and deferred compensation, which is typical. They're probably not going to look at this. It's a smaller, closely held banks are trying to hold on to or get some good talent in that. You know, they basically were trying to use this to compete against stock options.

I have one last question before we get out of here. I know you have a busy day to day. I've never really asked sort of this question, but geographically what we're here in Buffalo, New York, but who who could this policy help in the country, around the country? And how does that work out?

Well, if this country can work in all 50 states and D.C., I'm dealing with a newer company that we have to do business mucositis out of New York to do two business regulations for that. And they're pretty specific. The problem in New York is you've had a plethora of insurance carriers leave New York because of the regulatory environment. And it is what it is. And a lot of you better companies that just don't want to do business here anymore. So we have to kind of work around it, you know, but really primarily applies to life insurance on health insurance and disability insurance. It's not that big an issue, but a life insurance is.

And you feel this could help a lot of people around the country. I would have to imagine, outside of our little wheelhouse here.

Oh, absolutely. Absolutely. There are a lot of community banks that are public, that are controlled by families. And that's that that's the other thing. You know, this is great for a family situation because you're taking care of the family and. You know, there are too many opportunities where you can take money. Get your money back. You know, think about this in terms of benefits. When you buy a benefit for an executive, you write the check. You may be taking the deduction. This is not deductible. But if you take the deduction, that's it. You never get your money back in the executively for all. It's it is what it is here. You're getting your money back and you're building up on a on a tax deferred basis of substantial assets to create significant non taxable retirement income. It's not subject to market conditions. It's huge.

And what would someone need to do to get started?

Call and became associates?

Ok, that's simple, folks. Just give me a call. He can take a look and let you know if this isn't the right plan for you. There's one out there. Go back. Check out a couple of our episodes. We're going to keep breaking these down, giving you more information, because we just feel it's it's got to get out there and we think we can help a lot of people.

Super Fiame, thanks for your time.

Well, bills go bills.