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Lecture Employee benefits and retirement planning - Chapter 44: Death benefit only (DBO) plan

This chapter begins with a general discussion of death benefit only (DBO) plans, and the ways in which they can be used. Following this, advantages and disadvantages are discussed, focusing on estate and income tax aspects of DBOs. A brief discussion of design features precedes the section on tax implications, focusing on inclusion of death benefits in the insured-employee’s estate. | What is it? Plan by which an employer defers employee compensation and pays it to the employee’s designated beneficiary at the employee’s death No benefit payable in any form to employee during lifetime Copyright 2009, The National Underwriter Company When is it indicated? When highly compensated employee expects to have a large estate to face significant federal estate tax liability because estate payable to non-spouse beneficiary As supplement to qualified retirement plan benefits As a replacement for a split dollar plan To defer compensation for younger employees with need for insurance Copyright 2009, The National Underwriter Company Advantages With proper design, DBO benefits can be excluded from employee’s estate for federal tax purposes Death benefit provides estate liquidity and cash to beneficiaries Benefit not taxable to employee during life Employer can avoid tax if finance plan via purchase of insurance Copyright 2009, The National Underwriter Company Disadvantages Entire benefit taxed as ordinary income to beneficiary even if funded with life insurance Keeping death benefit out of employee’s estate requires careful planning, limiting plan flexibility Employer-corporation’s tax deduction for the plan is deferred until benefit paid and beneficiary includes proceeds in income Copyright 2009, The National Underwriter Company Design Features Several design options exist: Fixed dollar amount Average compensation over period of time Benefits can be loosely related to death benefit under insurance policy on employee’s life purchased and owned by employer Copyright 2009, The National Underwriter Company Tax Implications Death benefit excluded from employee’s estate if plan does not provide any benefits payable during employee’s lifetime employee does not have right to change beneficiary after plan established Benefits paid to employee’s beneficiary are taxable in full to beneficiary as ordinary income Copyright 2009, The National . | What is it? Plan by which an employer defers employee compensation and pays it to the employee’s designated beneficiary at the employee’s death No benefit payable in any form to employee during lifetime Copyright 2009, The National Underwriter Company When is it indicated? When highly compensated employee expects to have a large estate to face significant federal estate tax liability because estate payable to non-spouse beneficiary As supplement to qualified retirement plan benefits As a replacement for a split dollar plan To defer compensation for younger employees with need for insurance Copyright 2009, The National Underwriter Company Advantages With proper design, DBO benefits can be excluded from employee’s estate for federal tax purposes Death benefit provides estate liquidity and cash to beneficiaries Benefit not taxable to employee during life Employer can avoid tax if finance plan via purchase of insurance Copyright 2009, The National Underwriter Company .