Page 268 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

254 The Complete Guide to Executive Compensation

successors be named in the event one or both named trustees no longer serve as a trustee.
There are two types of trusts: inter vivos and testamentary. An inter vivos trust is created by
the executive while alive; a testamentary trust is created by the executive’s will. Inter vivos
trusts may be either revocable or irrevocable; testamentary trusts are always irrevocable. The
granter cannot withdraw property transferred through an irrevocable trust. Assets are distrib-
uted to beneficiaries in accordance with the terms of the trust, which designate the occur-
rence of a specified event or attainment of a point in time. Such trusts can be designed to be
either short or long term in duration, depending on the objective in establishing the trust.
One example is the sprinkle trust, which distributes assets from the trust at stated intervals or
prescribed ages of the beneficiaries. Another example is an educational trust, which might be
established to coincide with the completion of high school and beginning of college. Two
popular trusts for charitable institutions are the charitable remainder trust and the charitable
lead trust. With a charitable remainder trust, payments are received for a stated period of
time from a donation made to the trust, with the charity receiving the remainder after
payments cease. The charitable lead trust is just the opposite. The designated charity receives
payments from the trust until the person dies. At that point the remainder goes to the
designated beneficiary.
A revocable or living trust is a legal entity to which the executive transfers all or part of
his or her assets. Although no longer in the executive’s name, the assets remain under the
executive’s complete control since the power to add or withdraw assets and amend the
conditions of the trust is retained. Some people believe the advantage of this type of trust is
that beneficiaries will have immediate access to assets in accordance with the terms of the
trust without going through the probate process. Others believe this is little advantage since
the probate process can be short. However, a living trust does not reduce estate or income
tax liabilities. While the executive is alive, the IRS considers the trust nonexistent since the
income-producing assets are still owned by the executive.
In summary, the many aspects of financial planning are of high importance to executives
and reasonably tax effective (taxable to executive but deductible above an allowance and tax
deductible to the company).
Family Foundations. There are formed to give away assets to charitable organizations and
pass down charity values to involved family members. There are strict IRS rules regarding
how the donation is funded and the minimum amount it must give away annually or be
subject to an excise tax. Investment decisions and the process of selecting participants along
with the amount to be awarded may be more work than most want to undertake.
Legal Assistance. Such services can be provided under an insurance contract or by direct
company payment. Assistance programs take the form of either a closed panel (a specific list of
attorneys) or an open panel (allowing the executive to choose an attorney). The former is an
easy plan to administer for cost-control purposes, whereas the latter provides the employee
more flexibility. While most plans are limited to routine work (e.g., adoptions, property
closings, and wills), some offer a full range of covered services (including bankruptcy, criminal
offense, and divorces). Section 120 of the Internal Revenue Code prescribes the requirements
for qualified group legal services plans. Some argue that these plans give the middle class the
same benefit now enjoyed by the affluent (who can afford top legal advice) and the indigent
poor (who have such services provided at no cost through legal aid programs).
Executives often need someone to act on their behalf because of their unavailability or
incapacitation; this can be accomplished through the power of attorney. The period of time