Assignment 12 - Accumulating and Deploying Cap for Targeted Goals Flashcards by Kim Bowman

CV accumulation is guaranteed as a $ amt + determinable interest by insurance comp.
inv. authority + risks are borne by the ins. comp.
if ins. comp becomes insolvent - owners become general creditors of the insurer
COSTS - recover from the spread b/t current i/r pd on value and rate earned by insurer on its portf.

fixed dollar annuity

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sales charges deducted from the premiums when an annuity is purchased

front-end load

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charges imposed on if more than a certain amt of the contract is w/drawn w/in a specified period of time after purchase

surrender charges

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cap appreciation plan
accts maintained for select EEs reflecting the full value of a certain amt of ER stk but contains no actual stk
value of stk varies and is pd out to the exec at some point

phantom stock

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cap. appreciation plan
arrangement by which a corp. grants stk or stk option to an EE, but ownership of the stk is subject to a substantial risk of forfeiture
grant of stk is taxed as ord. income at FMV less any cost to EE (when stk is no longer subj. to substantial risk of forf.
Sect. 83 can be applied here for tax reasons because option holder believes that his/her performance will improve the stk to the extent that taking taxes now will be more tax-advantageous than waiting until fully vested

restricted stk plan

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ER stk plans that are not based on any special tax law provisions related to them, but are governed by general tax law principles

principles are governed by Sect. 61 and 83

nonstatutory plans

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type of fixed $ annuity that combines a minimum insurance company guarantee w/ an additional interest earnings component linked to a stk mkt index

equity indexed annuity

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annuity that allows the owner to choose when to pay periodic premiums to build up the annuity value

pmts can be chg’d or discontinued at owner’s discretion

flexible premium annuity

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types of Indiv. Retirement Accts (IRAs)

Regular (earnings-related) traditional IRA
Rollover traditional IRA
nondeductible IRA
Roth IRA (earnings related)
Roth IRA (conversion from traditional IRA)
Spousal IRA
Coverdell Education Savings Acct (Education IRA)
SEP-IRA
SIMPLE-IRA

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Certian conditions for an IRA

indiv. retirement accts
indiv. retirement annuity

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type of IRA that is set up under the terms of a written trust or custodial acct w/ fiduciary instit. that meets IRS requirements

most are custodial accts

indiv. retirement acct

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flexible premium annuity contract through an IRA
purpose is to assure the annuitant an income that can’t be outlived
owner pays specified sum in return for periodic pmts that will go for as long as the life
partly principal and inv. income
contract issued by an ins. company
owner’s interest is non-forfeitable
if security for loan - deemed as a distrib.
cannot be borrowed against or given away to others
balances can be subj. to creditor if state laws have that

indiv. retirement annuity

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(2) tax adv for traditional IRAs

owner receives a current income tax ded. for contrib.
inv. earnings on assets w/in the IRA grow w/o current taxation until distrib. are made from the acct - then taxed at current income taxation levels

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tax treatment of w/drawals of traditional IRAs

fully taxable as ordinary income, since no tax has been paid on the money in the type of IRA
if occuring before owner is 59 1/2, additional 10% penalty tax will be put on the taxable amt of distrib. unless for a hardship
required distributions begin at 70 1/2

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Rollover traditional IRAs

receive elig. rollover distrib. from qualified retirement plans, tax-sheltered annuities (TSAs) and Sect. 457 gov’t deferred-comp plans
may also occur from and IRA to a qualifed plan, a TSA, or 457 plan

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tax adv. of ROTH IRA

investment earnings and cap gains will never be taxed since distrib. from ROTH IRA are income tax-free (if qualified distrib.)

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qualified distrib. from ROTH IRA

distrib must be made at least 5-yrs after the tax yr in which a person made the first contrib.

AND

on or after the person attains the age of 59 1/2
on acct of the person’s death or disability
as a qualified first-time home buyer distrib.

if it doens’t meet these - the untaxable will become taxable income and the 10% penalty tax will be enforced

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requirements for Spousal IRAs

married filing a joint return
one of the spouses has no comp during that tax year
max contrib. to both spouse and working spouse’s IRAs is smaller of 100% of working spouse’s comp or the applicable $ limits for that year
can be traditional or Roth IRA
separate accts

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Are there any legal limits on the amt of annual contrib. to an annuity contract?

contib. are made on an A/T basis rather than on a P/T basis

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Limitations on early distributions for annuities

most have reducing surrender charges if distrib. are taken during early years of contract
other than certain exceptions, they are subj. to 10% penalty tax on early distrib. if owner isn’t 59 1/2
contracts generally specify a max age in which mandatory distrib. must take place (doesn’t have to follow tax law)

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type of annuity that the owner designates among various inv. funds as to where the annuity premiums are to be invested.
no current tax liability in reallocating CVs; just separate accts
inv. returns depends on perf. of separate accts where funds are allocated
inv. authority and risk resides with owner NOT ins. company
COSTS - levy charges annually against the contract’s accumulated value

variable annuities

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(2) categories of ER Stock Plans

statutory
nonstatutory

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ER stk plan that the IRC allows special tax adv. if certain requirements are met

statutory plans

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tax law requirements for Incentrive Stk Options (ISOs)

term of option cannot exceed 10 yrs
option price must be <= value of stk when option was granted
no disposition can be made w/in 2 yrs from granting the option or w/in 1 yr of transfer of the stk to him/her after exercise of the option
option must be nontrasferabel except by will or inheritance at death
max value of stk to be exercised by first timer cannot exceed $100,000

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main tax adv of ISO

no regular income tax EE is taxed only when it is sold; any gain realized is taxed as cap gain

basic elements of EE stock purch. plans

* statutory option; Section 423 plans * all FT ees meeting certain eligib. requirements are allowed to buy stk usually at a discount * thru P/R until they decide to exercise their options at the end of the option period (or refunded if period passes) * option price cannot be less than the lower of 85% of the stk's FMV when option was granted or exercised * cannot favor highly paid exec. * no EE owning 5% or more * max annual value of stk subject to these plans is $25,000 * if funds are not exercised, they are returned to EE w/ int.

EE perspective for tax treatment for EE Stk Purch. Plans

no gross income for participating EEs at grant or exercise if all requirements of Sect. 423 are met * no tax at grant or exercise of option for elig. purchases * taxed as ordinary income at sale of stk * ER doesn't get corp income tax ded at grant or exercise

LRC section that is applicable to _non-statutory_ stk comp plans provides an all-inclusive defin. of gross income for fed'l income tax purposes

Sect. 61

* LRC sect. that is applicable to _non-statutory_ stk comp plans * deals w/ taxation of property transferrred in connection w/ perf. of services * FMV of property transferred to person for the perf. of services shall be included in that person's gross income in the 1st taxable yr in which rights in the property become non-transferrable or are not subj. to substantial risk or forfeiture * investor can elect w/in 30 days of a transfer to include the FMV of the prop. in gross income - CHOOSING to take tax NOW as opposed to IN THE FUTURE b/c they believe that the inv. will APPRECIATE and thus paying taxes now will result in a lower burden * ER receives a corp. income tax ded. when this section is elected and comp paid in the amt is taxabl eto the EE

Sect 83

basic chara. of NQSO

* do not meet requirements for ISOs * taxed on general tax law princ. (no tax advantages) * more flexible * terms decided upon by parties * no limits on value or amt of stk subj. to options exercised in one yr * usually granted w/ an option price of 100% of stk's FMV on date of grant and option terms of around 10 yrs

EE taxes and NQSOs

* no taxable event at grant - tax regs view their value as not being readily ascertainable * when exercised - EE receives ordinary income for fed'l income tax purp. = to diff b/w FMV of stk at exercise and the option price * ER receives a tax ded. for the same amt of comp realized

* cap appreciation plan * accts only offered to select EEs * reflects the appreciation in the ER's stk over a certain time period * when exec's right to this become final, pd out in cash and taxable

stock appreciation rights (SARs)

* cap appreciation plan * select EEs are granted stk or options where vesting is contingent on certain corp. or other perf. measures being met

perf. shares or perf.-based stk options

ways to exercise stk options

* cash exercise * stk-for-stk exercise * cashless exercise * reload options

* way to exercise stk options * involves paying option price in cash to ER and receiving the stk * if NQSO - ER will require w/holding of fed'l, state, local and FICA taxes on the taxable amt

cash exercise

* way to exercise stk options * EE delivers previously owned shares of ER stk = to option price and then receives the new stk * no gain recognized on the exchg * new shares will have same holding period and income tax basis for cap gain purposes as the previously owned shares

stock-for-stock exercise

* way to exercise stk options * through a stkbroker * stkbroker buys the option stk from the corp. at the exercise price, sells enough stk in the open mkt to cover the purchase price plus expenses and delivers the remaining stk to the option holder * if taxable event - enough stk is sold to cover tax w/holding

cashless exercise

* way to exercise stk options * additional a stock-for-stock exercise options where they pay the exercise price for stk w/ previously owned stk of the the corp. * normally is for the same # of shares used to pay exercise price * for the remainder of the option period of the underlying option that was exercised * depends usually on indiv's fin. position

reload options

* type of IRA * allow income earners not partic. in ER retirement plan to contrib. up to lesser of 100% of comp or $5,000. ($1,500 for over 50 yr olds)

traditional IRA

contrib. limits for IRAs

* must have income * has not attained age 70 1/2

* type of IRA * allow income earners not partic. in ER retirement plan to contrib. up to lesser of 100% of comp or $5,000. ($1,500 for over 50 yr olds) * must have income * has not attained age 70 1/2 * allow for contrib. w/ AFTER-TAX $s (you pay now) * no mandatory distribs except at death

ROTH IRAs

converted ROTH IRAs

* from trad. to ROTH * taxable as oridnary income in the yr of conversion * SEP, SIMPLE-IRA, and qualified retirement plan can be converted to a ROTH

Coverdell Education Savings Accts

* can be contrib. to by indiv. in annual amt of $2,000 per beneficiary, subj. to certain income limits * not tax-ded. * to be eligible for tax-free distrib - amts distrib. by the beneficiary must not exceed qualif'd ed. expenses (or 10% penalty)

phases of annuities

1. accumulation period - contribs are made to annuity and it becomes a cap accumulation device 2. distrib. phase - annuitant or beneficiary begins receiving pmts from the annuity

annuity distributions

* most have reducing surrender charges if distrib. are taken during hte early yrs of the contract * indiv. annuties are subj to the 10% penalty tax on early distrib. * contracts generally specify a max age by which benefits must commence

Inv. Returns on Fixed-$ annuities

* min guaranteed i/r is set * bailout provision in place in case the current rate declared by insurer is below a certain leve, owner can w/draw all funds w/o surrender charge * ins. comp will set rate based on general inv. portf. * insurers base rate on some outside mkt i/r so it changes w/ mkt conditions

inv. returns on variable annuities

depend on perf of subacct or accts to which the annuity funds are allocated

* this is a guaranteed min benef under variable that is the standard death benefit * financed by a portion of the risk charge * enhanced death benefits for which a separate asset-based charge may be levied

Guaranteed Minimum Death Benefits (GMDBs)

* this is a guaranteed min benef under variable annuities (VA) * guarantees retirement benefits during an indiv's lifetime

Guaranteed Min Living Benefits (GMLBs)

types of Guaranteed Min Living Benefits (GMLBs)

* Guaranteed Min Accumulation Benefits * Guaranteed Min Income Benefits * Guaranteed Min W/drawal Benefits * LTC riders

* type of Guaranteed Min Living Benefits (GMLBs) * guarantees that the value of the benefit base in the VA will increase at a certain rate regardless of how the underlying subaccts perform

guaranteed min. accumulation benefits

* type of Guaranteed Min Living Benefits (GMLBs) * guaranteed a future lifetime annuity income based on a guaranteed benefit base * mainly after VA has been in place for a # of yrs

guaranteed min income benefits

* type of Guaranteed Min Living Benefits (GMLBs) * guarantee that the annuitant can w/draw a specified %age of the accumulated value as long as the annuitant lives

guaranteed min w/drawal benefits

* type of Guaranteed Min Living Benefits (GMLBs) * may be added to annuity contracts, resulting in "combo contracts" * tax-deferred inside buildup for annuities may be used tax-free to pay for LTC cov'g

LTC Riders

this ratio allows an owner to divide his inv. by expected return of the annuity contract and then after annutiy pmts commence, he may exclude a proportionate amt of annuity pmts from his gross income due to having an A/T cost basis in the contract tha tis partially being paid back to him

exclusion ratio

treatment of cash w/drawals from annuities

treated as first coming from earnings in the contract and are taxed as ordinary income until inv. earnings are exhausted (interest first concept)

treatment of loans from annuities

considered distrib. from the contract and are taxed as partial w/drawals

treatment of gifts of annuities

trigger a taxable event for donor on the inside inv. buildup of the annuity in the form of ordinary income

terms of Incentive Stock Options (ISOs)

* term \> 10 yrs * option price must equal or exceed the value of the stk when the option was granted * no disposition can be made by th eperson w/in 2 yrs from grainting the option and w/in 1 yr of the transfer of stk * option must be non-transferable * max value of stk that can be exercised for the 1st time in a calendar yr cannot exceed $100,000 * EE never realizes com income; ER never gets a corp. income tax ded

the period of continuous employment during which must elapse b/w the granting of an option and exercise

vesting of an option

this hasn't been allowed other than at death but, some corps have amended their plans to allow for this on NQSOs

transferability of options

when the annuity pmts begin

annuity starting date

some ERs pay part of EEs' current comp in unrestricted stk. EEs receive current comp = to the FMV of stk

current stk bonus

accts that meet the requirements of a ROTH or trad'l IRA, through ER-sponsored qualified plans, in which EEs may make voluntary contribs.

deemed IRA

Assignment 12 - Accumulating and Deploying Cap for Targeted Goals Flashcards

(64 cards)