Abstract:
The present invention provides a system, method and apparatus for providing an executive compensation system having a first entity, a money lender, and an insurer. The first entity receives a taxable sum of money from a second entity, which owes the taxable sum of money to a person. The first entity provides one or more periodic payments to the person until the person dies, wherein the one or more periodic payments determined from the taxable sum of money and the person&#39;s life expectancy. The money lender loans a non-taxable sum of money to the person and in return receives one or more periodic interest payments from the person. The non-taxable sum of money is determined from a fixed rate of interest and the one or more periodic interest payments that are substantially equivalent to the one or more periodic payments. The insurer provides a life insurance policy for the person&#39;s life such that the life insurance policy pays a death benefit substantially equivalent to the non-taxable sum of money.

Description:
FIELD OF THE INVENTION 
     The present invention relates generally to pension plans, and more particularly to a system, method and apparatus for providing an executive compensation system 
     BACKGROUND OF THE INVENTION 
     Without limiting the scope of the present invention, this background of the invention is described in connection with executive compensation systems, which may include compensation paid to owners of privately held businesses for the sale of those businesses. The present invention, however, is not limited to compensation systems for executives, and is applicable to compensation systems for one or more individuals. 
     Executive compensation systems, such as pension plans, 401(k) plans, non-qualified deferred compensation agreements and stock option plans, can easily be combined to provide a retiring executive, officer or director with a “pension plan” having a value of two to three million dollars or more. The taxes on such a “pension plan” can be staggering, especially if the “pension plan” is to be paid in a “lump sum.” 
     Similarly, owners of privately held businesses often want or must sell their business when they retire. Although an owner may have various other sources of retirement income, the owner&#39;s main source of retirement income typically comes from the sale of the business. Such a sale may result in an unacceptably high tax bill. As a result, the owner will typically demand a higher price for the business to offset the taxes that must be paid. 
     SUMMARY OF THE INVENTION 
     The present invention provides an executive compensation system having a first entity, a money lender, and an insurer. The first entity receives a taxable sum of money from a second entity, which owes the taxable sum of money to a person. The first entity provides one or more periodic payments to the person until the person dies, wherein the one or more periodic payments determined from the taxable sum of money and the person&#39;s life expectancy. The money lender loans a non-taxable sum of money to the person and in return receives one or more periodic interest payments from the person. The non-taxable sum of money is determined from a fixed rate of interest and the one or more periodic interest payments that are substantially equivalent to the one or more periodic payments. The insurer provides a life insurance policy for the person&#39;s life such that the life insurance policy pays a death benefit substantially equivalent to the non-taxable sum of money. 
     In another embodiment, the executive compensation system provides an annuity provider, a money lender and an insurer. The annuity provider receives a taxable sum of money from a business, which owes the taxable sum of money to a person. The annuity provider then provides one or more periodic payments to the person until the person dies, wherein the one or more periodic payments are determined from the taxable sum of money and the person&#39;s life expectancy. The money lender loans a non-taxable sum of money to the person and in return, receives one or more periodic interest payments from the person. The non-taxable sum of money is determined from a fixed rate of interest and the one or more periodic interest payments that are substantially equivalent to the one or more periodic payments. The insurer provides a life insurance policy for the person&#39;s life having one or more insurance premiums that are paid by the business such that the life insurance policy pays a death benefit substantially equivalent to the non-taxable sum of money. 
     In another embodiment of the present invention, the executive compensation system provides a charitable remainder trust, a money lender and an insurer. The charitable remainder trust receive a taxable sum of money from a buyer, which owes the taxable sum of money to a person. The charitable remainder trust then provides one or more periodic payments to the person until the person dies, wherein the one or more periodic payments determined from the taxable sum of money and the person&#39;s life expectancy. The money lender loans a non-taxable sum of money to the person and in return, receives one or more periodic interest payments from the person, such that the non-taxable sum of money is determined from a fixed rate of interest and the one or more periodic interest payments that are substantially equivalent to the one or more periodic payments. The insurer provides a life insurance policy for the person&#39;s life such that the life insurance policy pays a death benefit substantially equivalent to the non-taxable sum of money. 
     The present invention also provides a method for providing an executive compensation system comprising the steps of determining one or more periodic payments from a taxable sum of money, which is owed to a person by a second entity, and the person&#39;s life expectancy. The non-taxable sum of money is then determined from a fixed rate of interest and one or more periodic interest payments that are substantially equivalent to the one or more periodic payments. Next, a life insurance policy is obtained for the person&#39;s life, the life insurance policy having a death benefit that is substantially equivalent to the non-taxable sum of money. Thereafter, the taxable sum of money is transferred from the second entity to a first entity, the non-taxable sum of money is transferred from a money lender to the person and the one or more periodic payments are periodically transferred from the first entity to the person and the one or more periodic interest payments are periodically transferred from the person to the money lender. The death benefit is finally used to substantially repay the money lender for the non-taxable sum of money after the person&#39;s death. 
     In addition, the present invention provides a computer program embodied on a computer-readable medium for defining an executive compensation system. The computer program comprises code segments for determining: (1) a projected net income payment from an investment; (2) a loan amount based on an interest rate and an interest payment such that the interest payment is equal to or less than the projected net income payment; (3) a premium for a life insurance policy such that the life insurance policy provides a death benefit equal to or greater than the loan amount; and (4) a projected income from investing the loan amount. 
     Other features and advantages of the present invention shall be apparent to those of ordinary skill in the art upon reference to the following detailed description taken in conjunction with the accompanying drawings. 
    
    
     BRIEF DESCRIPTION OF THE DRAWINGS 
     The above and further advantages of the present invention may be better understood by referring to the following detailed description in conjunction with the accompanying drawings, in which: 
     FIG. 1A is a flow chart illustrating the functions provided by the various entities during the setup of an executive compensation system for an executive, officer or director of a business in accordance with a preferred embodiment of the present invention; 
     FIG. 1B is a flow chart illustrating the functions provided by the various entities during the operation of the executive compensation system for an executive, officer or director of a business in accordance with a preferred embodiment of the present invention; 
     FIG. 1C is a flow chart illustrating the functions provided by the various entities during the termination of the executive compensation system for an executive, officer or director of a business in accordance with a preferred embodiment of the present invention; 
     FIG. 2A is a flow chart illustrating the functions provided by the various entities during the setup of the executive compensation system for an owner of a business that is being sold in accordance with another embodiment of the present invention; 
     FIG. 2B is a flow chart illustrating the functions provided by the various entities during the operation of the executive compensation system for the owner of a business that is being sold in accordance with another embodiment of the present invention; 
     FIG. 2C is a flow chart illustrating the functions provided by the various entities during the termination of the executive compensation system for the owner of a business that is being sold in accordance with another embodiment of the present invention; and 
     FIGS. 3A,  3 B and  3 C are flow charts describing the software used to define an executive benefits system in accordance with an embodiment of the present invention. 
    
    
     DETAILED DESCRIPTION OF THE INVENTION 
     Referring to FIG. 1A, a flow chart illustrating the functions provided by the various entities during the setup of an executive compensation system for an executive, officer or director of a business, in accordance with a preferred embodiment of the present invention, is designated generally by the numeral  10 . The setup of the executive benefits system  10  involves a business  12 , an annuity provider  14 , an insurer  16 , a money lender  18 , an executive, officer, director  20  or any other person that the business  12  desires to provide the executive benefits system to, and one or more investments  22 . 
     During system setup  10 , and as shown by line  30 , the executive, officer or director  20  either accepts a defined benefit plan that provides annuity payments or instructs the administrator of the business&#39; 401(k) or pension plan to purchase a life annuity using some or all of the executive&#39;s 401(k) balance or pension. In the case of a defined benefit plan, such as a non-qualified deferred compensation plan, the business  12  offers a deal including the purchase of a life annuity as an payment option which is then accepted by the executive, officer or director  20 . The business then purchases a life annuity  32  from the annuity provider  14 . In the case of a defined contribution plan, such as a pension plan or a 401(k) plan, the business  12  takes the value of those benefits and purchases a life annuity  32  from the annuity provider  14 . In either case, the corporation  12  purchases a split dollar life insurance policy  24  on the executive, officer or director  20  from the insurer  16 . 
     The amount of coverage supplied by the split dollar life insurance policy  24 , is set up to provide a death benefit substantially equivalent to the amount of the loan  26  provided by the money lender  18 . The loan  26  typically has a term of 30 to 40 years or until the executive, officer or director  20  dies, and is preferably based on a fixed interest rate. The money lender  18  receives a collateral assignment  28  of the life insurance policy to secure repayment of the loan  26 . The executive, officer or director  20  then invests the loan principal  34  in one or more investments  22 . 
     Now referring to FIG. 1B, a flow chart illustrating the functions provided by the various entities during the operation of the executive compensation system for an executive, officer or director of a business, in accordance with a preferred embodiment of the present invention, is designated generally by the numeral  40 . Throughout the system operation, the business  12  pays the life insurance premiums  42  to the insurer  16 . Typically, this is highly desirable to the business  12  because the life insurance premiums  42  impact corporate earnings considerably less than other forms of executive compensation plans, such as non-qualified deferred compensation or stock options. As a result, the “bottom line” or profit of the business  12  is improved. The executive, officer or director  20  then receives periodic annuity payments  44  from the annuity provider  14  and uses those payments  44  to pay the periodic interest payments  46  to the money lender  18 . The executive, officer or director  20  also receives investment income  48  from the one or more investments  22 . 
     Referring now to FIG. 1C, a flow chart illustrating the functions provided by the various entities during the termination of the executive compensation system for an executive, officer or director of a business, in accordance with a preferred embodiment of the present invention, is designated generally by the numeral  60 . At system termination  60 , which typically occurs after the death of the executive, officer or director  20  (FIGS.  1 A and  1 B), the insurer  16  pays off the loan to the money lender  18  using the death benefits under the life insurance policy  62 . The insurer  16  also pays the balance of the death benefits under the life insurance policy  64 , if any, to the estate of the executive, officer or director  66 . In addition, the insurer  16  returns the life insurance premiums  70  to the business  12 . This is a benefit of purchasing a split dollar life insurance policy. Lastly, the estate of the executive, officer or director  66  also receives the investment principal  68  from the one or more investments  22 . 
     For example, an executive is expected to retire at age 65 and have a projected 401(k) balance of $2,500,000. At retirement, the executive may choose to receive his or her 401(k) balance as a lump sum of $1,500,000 (assuming federal income taxes of 40% or $1,000,000), or roll the 401(k) balance into an Individual Retirement Account (“IRA”) and receive $150,000 per year (assuming a 10% rate of return and federal income taxes of 40% or $100,000). Under the executive compensation system of the present invention, the executive can exchange his or her 401(k) balance of $2,500,000 for a life annuity that pays $230,140 per year for life. The annuity income may then be used to pay the 8% interest on a loan of $2,876,750. The interest payments are then tax deductible as long as the executive has investment income equal to or greater than the interest payments. Thus there is no net taxable income from the 401(k) benefits and the loan. Accordingly, the executive has transformed a taxable 401(k) benefit into a tax-free lump sum account balance of $2,876,750. Assuming that the executive invests all of the loan amount at a net after tax return of 8%, the executive receives a net income of $230,140 for life. Then upon the death of the executive, the life insurance policy pays off the loan balance, and the executive&#39;s estate still has the originally invested loan balance plus any remaining balance from the life insurance policy. A comparison of the two plans shows an increase in annual income of 153% and a future value of benefits received of 166% at age 85. 
     Referring to FIG. 2A, a flow chart illustrating the functions provided by the various entities during the setup of the executive compensation system for an owner of a business that is being sold, in accordance with another embodiment of the present invention, is designated generally by the numeral  100 . The setup of the executive compensation system  100  involves a business owner  102  of a business, a money lender  104 , an insurer  106 , a charitable remainder trust  108 , a buyer  110  and one or more investments  112 . The buyer  110  wants to purchase the business from the business owner  102 , but normally must pay more for the business to make up for the capital gains taxes that the business owner  102  must pay as a result of the sale. The present invention thus reduces the cost to the buyer  110  while simultaneously increasing the after tax value of the sale to the business owner  102 . The business owner  102  transfers the business  114  to a charitable remainder trust  108  in return for guaranteed periodic annuity payments for life  132  (FIG.  2 B). The charitable remainder trust  108  then sells the business for cash  116  to the buyer  110 . The sale of the business  116  by the charitable remainder trust  108  is tax exempt. 
     The business owner  102  purchases a single premium life insurance policy  118  from the insurer  106  using tax savings and a portion of the loan  120 . The money lender  104  provides the business owner  102  with the loan  120 . The amount of the loan  120  is calculated based on the annuity payments  132  (FIG. 2B) and the fixed interest rate of the loan  120  such that the annuity payments  132  (FIG. 2B) are substantially equivalent to the interest payments  134  (FIG.  2 ). In addition, the loan  120  typically has a term of 30 to 40 years or until the business owner  102  dies. A long term fixed interest rate loan is preferred because the executive compensation system does not have to address problematic contingencies, such as the loan being called prematurely or fluctuations in interest rates that would result in a shortage or surplus of annuity income to pay loan interest. The amount of coverage supplied by the single premium life insurance policy  118  is set up to provide a death benefit substantially equivalent to the amount of the loan  120  provided by the money lender  104 . The money lender  104  receives a collateral assignment  122  of the life insurance policy to secure repayment of the loan  120 . The business owner then invests a major portion of the loan principal  124  in one or more investments  112 . 
     Now referring to FIG. 2B, a flow chart illustrating the functions provided by the various entities during the operation of the executive compensation system for an owner of a business that is being sold, in accordance with a preferred embodiment of the present invention, is designated generally by the numeral  130 . Throughout the system operation, the business owner  102  receives periodic annuity payments  132  from the charitable remainder trust  108  and uses those payments  132  to pay the periodic interest payments  134  to the money lender  104 . The business owner  102  also receives investment income  136  from the one or more investments  112 . 
     Referring now to FIG. 1C, a flow chart illustrating the functions provided by the various entities during the termination of the executive compensation system for an owner of a business that is being sold, in accordance with a preferred embodiment of the present invention, is designated generally by the numeral  140 . At system termination  140 , which typically occurs after the death of the business owner  102  (FIGS.  1 A and to  1 B), the insurer  106  pays off the loan principal to the money lender  104  using the death benefits under the life insurance policy  142 . The insurer  106  also pays the balance of the death benefits under the life insurance policy  144 , if any, to the estate of the business owner  146 . Lastly, the estate of the business owner  146  also receives the investment principal  148  from the one or more investments  112 . 
     For example, a business owner can sell his or her business at age 65 for $2,500,000 which results in net after tax proceeds of $2,000,000 (assuming federal income taxes of 20% or $500,000). The business owner can then invest that money and receive $160,000 per year (assuming a 10% rate of return and federal income taxes of 20% or $40,000). Under the executive compensation system of the present invention, the business owner can set up a charitable remainder trust and transfer the business to the charitable remainder trust in return for annual payments of $225,000 per year for life. The annuity income may then be used to pay the 8% interest on a loan of $2,812,500. The interest payments are then tax deductible as long as the business owner has investment income of equal to or greater than the interest payments. Thus there is no net taxable income from the sale of the business. Accordingly, the business owner has transformed the sale of business into a tax-free lump sum account balance of $2,812,500. Assuming that the business owner invests all of the loan amount at a net after tax return of 8%, the executive receives a net income of $225,000 for life. Then upon the death of the business owner, the life insurance policy pays off the loan balance, and the business owner&#39;s estate still has the originally invested loan balance plus any remaining balance from the life insurance policy. A comparison of the two plans shows an increase in annual income of 153% and a future value of benefits received of 166% at age 85. 
     Referring to FIGS. 3A,  3 B and  3 C, the flow charts describing the software used to define an executive benefits system in accordance with an embodiment of the present invention are described. In FIG. 3A, processing begins in block  202  and the type of participant for which the executive benefits system is to be defined is determined in decision block  204 . If the participant is a business owner, various parameters relating to the business owner are read in block  206 . This data may include the business owner&#39;s current age, projected retirement age, details relating to the sale of the business and the business owner&#39;s finances and investment portfolio, taxes, projected interest rates, insurance rates, investment growth rates, etc. A executive compensation system is then created for the business owner in block  208 , which is further described in reference to FIG.  3 B. If the user desires to adjust any of the parameters and run a new plan, as determined in decision block  210 , the changes are made and processing returns to block  208  to create a new plan. If, however, the uses does not want to adjust any of the parameters, the results of the plan are stored and presentation materials are generated in block  212 . Processing then ends in block  214 . 
     If, however, the type of participant is an executive, officer or director, as determined in decision block  204 , various parameters relating to the executive, officer or director are read in block  216 . This data may include the executive, officer or director&#39;s current age, projected retirement age, details relating to the executive&#39;s finances and investment portfolio, taxes, projected interest rates, insurance rates, investment growth rates, etc. A executive compensation system is then created for the executive, officer or director in block  218 , which is further described in reference to FIG.  3 C. If the user desires to adjust any of the parameters and run a new plan, as determined in decision block  220 , the changes are made and processing returns to block  218  to create a new plan. If, however, the uses does not want to adjust any of the parameters, the results of the plan are stored in block  222 . If there are any more participants in the plan, such as the remaining executives in the business, as determined in decision block  224 , processing returns to block  216  where the process repeats until a plan has been generated for all participants. If, however, a plan has been generated for all participants, the impact of the plan on the cash flow and earnings of the business are calculated in block  226 . Presentation materials are then generated in block  228  and processing ends in block  214 . 
     In FIG. 3B, the process of creating a plan for a business owner begins in block  302 . The net proceeds from the sale of the business, after taxes, are calculated in block  304 . The projected net income from the investment of the net sale proceeds is calculated in block  306 . The projected tax savings and annuity payments are calculated if the business is transferred to a charitable remainder trust and subsequently sold in block  308 . The amount of the loan is calculated so that the interest payments on the loan are equal to or less than the projected annuity payments in block  310 . The cost of a single premium life insurance policy is calculated with a death benefit equal to or greater than the principal amount of the loan in block  312 . The portion of the loan principal that will be invested is calculated, along with the projected income from the investments in block  314 . A comparison of the current plan to the calculated executive benefits plan is displayed or printed in block  318 . Thereafter, processing returns to the main program in block  318 . 
     In FIG. 3C, the process of creating a plan for an executive, officer or director begins in block  402 . If the executive has a defined contribution plan, as determined in decision block  404 , the future value of the defined contribution plan is calculated using an assumed growth rate applied to the current account balance and the number of years until the desired retirement date in block  406 . The annuity payments are then calculated based on the future value of the defined contribution plan in block  408 . Thereafter or if the executive did not have a defined contribution plan, as determined in decision block  404 , the program determines whether the executive has a defined benefit plan in decision block  410 . If the executive has a defined benefit plan, the future benefits under the defined benefit plan are specified at the desired retirement date as a percentage of final compensation in block  412 . The executive&#39;s future compensation increases, if any, are projected in block  414  and the executive&#39;s retirement benefits are calculated in block  416 . The annuity payments are calculated based on a roll over of a lump sum distribution of the retirement benefits into the annuity in block  418 . Next, the greater of the periodic payments of the retirement benefits or the annuity payments are selected in block  420 . In other words, the actuaries that calculate the annuity purchase rates for a given business&#39; pension plan may use more conservative factors than those that are currently used by insurance companies. If so, the software will use the factors that provide more income to the executive. 
     Thereafter, or if the executive does not have a defined benefit plan, as determined in block  410 , the amount of the loan is calculated so that the interest payments on the loan are equal to or less than the selected payments in block  422 . The cost of a split dollar life insurance policy with a death benefit equal to or greater than the loan principal is calculated in block  424 . The life insurance amount consists of several components: the amount of the loan; the corporation&#39;s piece of the split dollar plan that returns to the corporation; the cumulative premiums that have been paid; and the amount reserved to provide a cost of money factor to the corporation for the use of money. These calculations may be performed by the software or by separate insurance company software, but the amounts are checked and the earnings impact and cumulative cash flow impact is modeled for the corporate buyer by software. The projected income from the investment of the loan principal is calculated in block  426 . A comparison of the current plan to the calculated executive benefits plan is displayed or printed in block  428 . Thereafter, processing returns to the main program in block  430 . 
     One objective of the present invention is for the interest paid on the loan to be deductible for federal income tax purposes. There is, however, a provision of the tax code that eliminates itemized deductions by 3% of the amount by which a taxpayers adjusted gross income exceeds a threshold amount (currently $124,500 on joint returns). The software analyzes the reduction in the amount of itemized deductions that can be claimed. This is done by using the retirement income from the Current Plan with that of the new plan to see if there is a loss of tax deductibility. For this purpose certain assumptions are used about other income and federal a state income tax rates. 
     Although preferred embodiments of the invention have been described in detail, it will be understood by those skilled in the art that various modifications can be made therein without departing from the spirit and scope of the invention as set forth in the appended claims.