TA K E N OT E

Recent developments in estate, business and tax planning

April, 2008
(Revised from 2nd Quarter 2006) Benefit Planning for S Corporation Owners:
INSIDE THIS ISSUE The RETIREMENT NIMCRUT
Jerry Weihs, JD, CPA, MBA, CLU, ChFC
Benefit Planning for S Corporation Owners:
The RETIREMENT NIMCRUT Apart from qualified plan benefits, there has been very little we could do in the
non-qualified benefits area for S Corp. owners. That is till now. If we have an S
Advanced Markets Group
800-432-1102 Corp. owner with a charitable intent, we can do some exciting things in the
benefit planning area. The use of a NIMCRUT can provide tax-advantaged
Advanced Markets Attorneys
retirement benefits. It achieves income deferral while simultaneously provid-
Janice Alexander Forgays, Esq., CLU
ext. 1846 ing the owner with an immediate charitable income tax deduction.
janice.forgays@sunlife.com The tax treatment of fringe benefits in a S Corporation (or S Corp.) is different
Jerry Weihs, JD, CPA, MBA, CLU, ChFC for owner-employees than for other employees. Most fringe benefits (other
ext. 1756 than bonus plans, split dollar and non-qualified deferred compensation
jerry.weihs@sunlife.com
arrangements) that are paid to S Corp. employees who are not shareholders, or
Deborah Moon, Esq., CLU who own two percent or less of the outstanding S Corp. stock, are generally tax-
ext. 1838
deborah.moon@sunlife.com free. These can be excluded from the employee’s taxable wages and are
deductible as fringe benefits by the corporation. On the other hand, Employee-
Rose Watson, Esq. Owners, owning more than two-percent of the S Corp. stock, are treated
ext. 7196
Rose.Watson@sunlife.com differently for fringe benefit purposes. These owners are treated in the same
manner as partners in a partnership. This generally means that the benefit is
Advanced Case Design
Douglas Bowden, CLU, ChFC includible in income to the employee-owner, S Corp. rules require >2% share-
ext. 2450 holder/employees be treated as partners for employee benefit purposes.
douglas.bowden@sunlife.com S Corp. owners, taxed as partners, must report and pay taxes on their “distributive
Greg Faux share” of the income for the taxable year even if it is not distributed.
ext. 1817
greg.faux@sunlife.com Many sections of the Internal Revenue Code provide favorable tax treatment of
employee benefits only to employees. Qualified retirement plans are a very
©2008 Sun Life Assurance Company of Canada. significant exception to the unfavorable treatment of >2% business owners in
All rights reserved. Sun Life Financial and the globe S Corps. Qualified plans can cover owners of S Corps. on much the same basis
symbol are registered trademarks of Sun Life as regular employees.
Assurance Company of Canada.
All guarantees are based on the claims-paying ability WHAT ABOUT NON-QUALIFIED DEFERRED COMPENSATION?
of Sun Life Assurance Company of Canada (Wellesley
Hills, MA), or in New York, Sun Life Insurance and What can we do for the >2% S Corp. shareholder? We have already determined
Annuity Company of New York (New York, NY). that qualified plans are a good deal for these owners. What about non-qualified
Not FDIC/NCUA insured. May lose value. plans? Deferred Compensation does not make sense since the shareholders
No bank/credit union guarantee. Not a deposit. have elected to be taxed on all current income as it is earned even if it is not
Not insured by any federal government entity. distributed. Thus, they are precluded from deferring income.
Continued on page 2
FOR PRODUCER USE ONLY.
NOT FOR USE WITH THE PUBLIC.
 Benefit Planning for S Corporation Owners: The RETIREMENT NIMCRUT
Continued from page 1
WHAT ABOUT SPLIT DOLLAR?
Split dollar in a S Corp. is economically unfeasible
for owners. The income flow through concept will
have the shareholders being taxed on the premium
contributions. In addition, there is a problem of
double taxation. The shareholders are taxed on
income used to pay the premium and the insured
shareholder employee will also be taxed again on
the value of the economic benefit. Therefore, a
portion of the premium cost will be taxed twice.
WHAT ABOUT A BONUS PLAN?
Since the shareholders have already elected to be
taxed currently on all income earned whether it is
distributed or not, an executive bonus plan would fit
the bill. The S Corp. pays the premium for a person-
ally owned life policy. The owner/employee picks up
the premium as current income. The policy would
be a permanent policy and could be heavily funded
to take advantage of tax-deferred accumulation. It
would provide death and/or retirement benefits in a
tax-efficient manner.
WHAT ELSE CAN WE DO?
Based on the foregoing information, we are quite
limited in what type of benefit plans we can provide
>2% S Corp. shareholders. Is there anything else
we can do for the S Corp. shareholders who have
either maxed out in their qualified plan contribu-
tions or because of the cost of including all employ-
ees in the plan, do not want to go that way?
WHAT ABOUT A NIMCRUT?
This is a charitable remainder unitrust with a make-
up provision which enables the S Corp. owner to
accumulate for retirement benefits and take advan-
tage of partial tax deductibility. This deduction is
unique to this type of trust plan and provides a tax
benefit to the S Corp. owner. Substantial contribu-
tions will be made to the RETIREMENT NIMCRUT
via distributions from the S Corp. and life insurance
should be purchased to replace the contributions
made to the charitable trust.
HOW DOES THE CONCEPT WORK?
The S Corp. owner gifts income to both the charitable
trust (NIMCRUT) and wealth replacement trust (ILIT).
The S Corp. owner will get an immediate income
2 tax deduction for each contribution to the
RETIREMENT NIMCRUT. The deduction will be
limited based on the owners age, interest assump-
tions, and other factors. Essentially the deduction
will be based on the valuation of the interest ulti-
mately to be received by the charity.
The RETIREMENT NIMCRUT will invest the
contributions, possibly a deferred annuity.
The Trustee determines when to distribute
income to the S Corp. owner. If a deferred annu-
ity is purchased, this can be delayed until the
S Corp. owner is ready to receive retirement
income.
Income may be distributed for a term of years
(not to exceed 20) or over the owner’s lifetime.
The balance of the Trust assets will go to charity
after the S Corp. owners death.
If Life insurance was purchased, the death bene-
fit will replace the value of the assets contributed
to the Charitable Trust. This wealth replacement
aspect keeps the heirs happy while the charity
benefits from the RETIREMENT NIMCRUT.
WHAT HAVE WE ACHIEVED?
Tax deductions for contributions made, a substantial
income stream on a deferred basis when needed for
retirement and an ultimate gift to charity. Finally, the
life insurance is used to replace the wealth transferred
through the RETIREMENT NIMCRUT. This plan not
only provides a financial benefit to the S Corp. owner,
but also provides a benefit to the charity of the
owner’s choice.
TAX/TECHNICAL ISSUES
The annual payout is set as a fixed percentage of
the underlying trust assets which are valued
annually. The fixed percentage cannot be less
than 5% nor more than 50%. See I.R.C. Sec.
664(d)(2)(A). Thus, if the trust grows, the payout
will grow accordingly. The payout can be limited
to actual trust “income” in the accounting sense.
If there is no trust accounting income in any one
year, there is no required distribution. That
income can be “made-up” by distributions in
later years. Under the RETIREMENT NIMCRUT,
the payout will be limited to the lessor of :
 fixed percentage, or
 actual trust income
However, if less than the fixed percentage is

distributed in any one year, the “shortfall” may be
made up in future years (to the extent income
exceeds the fixed percentage.)
A deferred annuity can work well within the RETIRE-
MENT NIMCRUT context. The key issue is when the
trust recognizes trust income. The trust is not deemed
to be in recent of income from the annuity until a
distribution from the annuity occurs. Therefore,
the trustee can control the amount of income each
year for distribution purposes.
AN EXAMPLE OF HOW A RETIREMENT
NIMCRUT WORKS
Rich is a 50 year old S Corp. owner. He is receiving
a significant amount of income from the S Corp.
of which he is a 50% owner. He would like to
accumulate more retirement benefits but is maxed
out in the S Corp’s qualified plan. He is willing to
commit $100,000 a year for the next ten years after
TA K E N OT E
which he would like to retire, at age 60. He likes the
RETIREMENT NIMCRUT concept and realizes it is
effectively his only non-qualified fringe benefit
choice and that a wealth replacement trust needs to
be an integral part of his planning.
Rich will establish a RETIREMENT NIMCRUT for
himself with a 6% payout to effectively start after 10
years. He will include a wealth replacement trust in
his planning, with approximately 81% of the contri-
bution going to the RETIREMENT NIMCRUT and
19% going to the wealth replacement insurance trust.
The RETIREMENT NIMCRUT will purchase a
deferred annuity and will not take only distribution
until year 11. After that the trustee will withdraw 6%
of the trust plus any desired portion of the “make-
up”. The funds gifted to the insurance trust will fund
a $1,000,000 insurance policy which will replace and
preserve the money gifted to the RETIREMENT
NIMCRUT.

The RETIREMENT NIMCRUT

Sun Universal Protector Plus

Client Name: Valued Client Specified Face Amount: $1,000,000

Sex/Age/Class: Male/50/Preferred Non-Tobacco

Wealth Replacement
NIMCRUT Trust (ILIT) Insurance

Beg of Year Beg of Yr

End of Year Cumulative Distribution/ Make-up Beg of Yr Amount Gifted to
Total Annual NIMCRUT Available Tax Accumulation Make-Up Payout rate @ Account Total ILIT Death Benefit
1
Year Age Outlay Contribution Deduction Value @ 6% Account 6% Distribution2 Distribution (Insurance Outlay) (Net to Heirs)
1 50 $100,000 $81,302 $17,994 $86,180 $4,878 $0 $0 $0 $18,698 $1,000,000
2 51 $100,000 $81,302 $18,810 $177,531 $14,927 $0 $0 $0 $18,698 $1,000,000
3 52 $100,000 $81,302 $19,654 $274,363 $30,457 $0 $0 $0 $18,698 $1,000,000
4 53 $100,000 $81,302 $20,520 $377,005 $51,797 $0 $0 $0 $18,698 $1,000,000
5 54 $100,000 $81,302 $21,412 $485,805 $79,295 $0 $0 $0 $18,698 $1,000,000
6 55 $100,000 $81,302 $22,328 $601,134 $113,322 $0 $0 $0 $18,698 $1,000,000
7 56 $100,000 $81,302 $23,269 $723,382 $154,268 $0 $0 $0 $18,698 $1,000,000
8 57 $100,000 $81,302 $24,234 $852,965 $202,549 $0 $0 $0 $18,698 $1,000,000
9 58 $100,000 $81,302 $25,221 $990,323 $258,605 $0 $0 $0 $18,698 $1,000,000
10 59 $100,000 $81,302 $26,226 $1,135,922 $322,902 $0 $0 $0 $18,698 $1,000,000
11 60 $0 $0 $0 $1,097,499 $290,512 $68,155 $32,391 $100,546 $0 $1,000,000
12 61 $0 $0 $0 $1,059,214 $258,121 $65,850 $32,391 $98,240 $0 $1,000,000
13 62 $0 $0 $0 $1,021,067 $225,731 $63,553 $32,391 $95,943 $0 $1,000,000
14 63 $0 $0 $0 $983,057 $193,340 $61,264 $32,391 $93,655 $0 $1,000,000
15 64 $0 $0 $0 $945,185 $160,950 $58,983 $32,391 $91,374 $0 $1,000,000
16 65 $0 $0 $0 $907,448 $128,559 $56,711 $32,391 $89,102 $0 $1,000,000
17 66 $0 $0 $0 $869,847 $96,169 $54,447 $32,391 $86,837 $0 $1,000,000
18 67 $0 $0 $0 $832,382 $63,778 $52,191 $32,391 $84,581 $0 $1,000,000
19 68 $0 $0 $0 $795,051 $31,388 $49,943 $32,391 $82,333 $0 $1,000,000
20 69 $0 $0 $0 $758,918 $0 $47,703 $31,388 $79,091 $0 $1,000,000
25 74 $0 $0 $0 $745,355 $0 $44,883 $0 $44,883 $0 $1,000,000
30 79 $0 $0 $0 $732,035 $0 $44,081 $0 $44,081 $0 $1,000,000
1. The available income tax deduction is derived from the actuarial value of the remainder interest received by the charity using the February 2008 Sec. 7520 rate of 4.2% and is based on the owners age,
interest assumptions and other factors. Please consult your financial or tax advisor to review your specific situation.
2. The Make-Up Account Distribution is specified at $32390.5 per year beginning in year 11 until the account is depleted.
This illustration assumes that the currently illustrated nonguaranteed elements of interest rates, COI charges and expense charges will continue unchanged for all years shown. This will not occur
and actual results will be more or less favorable than illustrated. The nonguaranteed elements will change over time and are dependent on the company's investment, mortality and expense
experience. This illustration must be accompanied by a basic illustration with the same date and premium outlay as this illustration. Please refer to the basic illustration for additional information,
including guaranteed policy values. These materials are not a contract and will not become part of any policy issued by Sun Life Assurance Company of Canada.

Continued on page 4

3
 TA K E N OT E
Benefit Planning for S Corporation Owners: The RETIREMENT NIMCRUT
Continued from page 3
The chart demonstrates how the RETIREMENT NIMCRUT with a defened annuity works. In year 11, 6%
of the Trust plus $32,391 from the make-up account will be distributed from the deferred annuity. This is
continued for 10 years or until the cumulative make-up account is drained. Of course, the amount of the
payout also depends on the account value of the deferred annuity.
The operational rule at Payout (line 4) calls for the lesser of the Fixed % (Line 1) or Actual Income
(Line 2), plus the cumulative make-up account. However, the payout cannot exceed Actual Income
(Line 2) which is controlled by distributions from the deferred annuity.
NIMCRUT PAYOUT EXAMPLE
Year 11 Year 12 Year 13 Year 14
1. Fixed % (6%) $68,155 $65,850 $63,553 $61,264
2. Actual Income $100,546 $98,240 $95,943 $93,655
(Line 1 + $32,391)
3. Cumulative $290,512 $258,121 $225,731 $193,340
Make-Up Account
4. Payout $100,546 $98,240 $95,943 $93,655
(< of 1 or 2 plus 3,
but cannot exceed 2)

SUMMARY  The total contributions made to the RETIREMENT

 A charitable income tax deduction partially offsets NIMCRUT ($100,000 for 10 years) are recovered
the income received from the S Corp. distribution. for the children on Rich’s death via the $1,000,000
 Retirement income accumulates for 10 years tax wealth replacement policy.
deferred in the RETIREMENT NIMCRUT.  The remainder interest in the trust is distributed

 Income payout starts in year 11 when Rich is age directly to a charity at Rich’s death.
60, and continues for his lifetime.

TAKE NOTE is a quarterly publication of Sun Life Financial’s Advanced Markets Group. This information
is intended to be of a general education nature. Sun Life Financial and its independent distributors do
not give legal, tax or accounting advice. For specific tax or legal advice seek and rely on a qualified tax
advisor or attorney. Sun Life Financial and its distributors specifically disclaim any liability or loss
which is incurred as a consequence, directly or indirectly, of the use of this publication.

SLPC 19244 08/08 FOR PRODUCER USE ONLY.

4 Exp. Date 08/09 NOT FOR USE WITH THE PUBLIC.