CASE STUDY

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0><tr> <td valign="top" colspan=2 height=90 BGCOLOR="#006699" TEXT="#080000" bgproperties="fixed" background="0be285a1erlcgo.gif"> <div> <FONT SIZE="5" COLOR="#FFCC66" FACE="Arial" ><B>NONQUALIFIED PLANS</B></FONT><B>     |     </B><A HREF="index.htm" TARGET="_top" TITLE="NONQUALIFIED PLANS"><U><B>home</B></U></A><B>                              </B><A HREF="id19.htm" TARGET="_top" TITLE="TABLE OF CONTENTS"><U>TABLE OF CONTENTS</U></A>   |   <A HREF="id48.htm" TARGET="_top" TITLE="FINAL EXAMINATION"><U>FINAL EXAMINATION</U></A></div> <div> <A HREF="id22.htm" TARGET="_top" TITLE="NONQUALIFIED PLANS "><U>NONQUALIFIED PLANS </U></A>   |   <A HREF="id23.htm" TARGET="_top" TITLE="DEFERRED COMPENSATION"><U>DEFERRED COMPENSATION</U></A>   |   <A HREF="id24.htm" TARGET="_top" TITLE="EXECUTIVE BONUS PLANS"><U>EXECUTIVE BONUS PLANS</U></A>   |   <A HREF="id26.htm" TARGET="_top" TITLE="GROUP CARVE OUT PLANS"><U>GROUP CARVE OUT PLANS</U></A>   |   <A HREF="id25.htm" TARGET="_top" TITLE="TAKEOVER DEFENSES"><U>TAKEOVER DEFENSES</U></A>   |   <A HREF="id89.htm" TARGET="_top" TITLE="REVIEW QUESTIONS"><U>REVIEW QUESTIONS</U></A>   |   <A HREF="id50.htm" TARGET="_top" TITLE="PRINTABLE VERSION"><U>PRINTABLE VERSION</U></A></div> <div> </div> </td> </tr><tr> <td valign="top" width=210 BGCOLOR="#FFCC66" TEXT="#080000" background="0bdd2c00dkelyh.gif"> <div> <A HREF="http://www.wallstreetinstructors.com" TARGET="_top" TITLE="http://www.wallstreetinstructors.com"><U><IMG SRC="0caaf630.gif" border=0 width="175" height="99" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></U></A></div> <div> copyright © 2002-2007 Wall Street Instructors, Inc.  All rights reserved.  </div> <bR> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="164" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFFFFF > <tR> <tD VALIGN=TOP HEIGHT= 20 ><NOBR><div> <A HREF="mailto:instructor@wallstreetinstructors.com" TARGET="_top" TITLE="mailto:instructor@wallstreetinstructors."><U><B>E-Mail An Instructor</B></U></A></div> </NOBR></tD> </tR> </TABLE></div> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>Module 2</B></div> <div> <B>MODULE 2</B></div> <div> <B>__________________</B></div> <div> <A HREF="id74.htm" TARGET="_top" TITLE="USES OF DEFERRED COMPENSATION"><U><B>USES OF DEFERRED COMPENSATION</B></U></A></div> <div> <A HREF="id75.htm" TARGET="_top" TITLE="PLAN BENEFITS"><U><B>PLAN BENEFITS</B></U></A></div> <div> <A HREF="id90.htm" TARGET="_top" TITLE="TYPES OF PLANS"><U><B>TYPES OF PLANS</B></U></A></div> <div> <A HREF="id103.htm" TARGET="_top" TITLE="DEFERRED COMPENSATION ARRANGEMENTS"><U><B>DEFERRED COMPENSATION ARRANGEMENTS</B></U></A></div> <div> <A HREF="id102.htm" TARGET="_top" TITLE="INSURANCE"><U><B>INSURANCE</B></U></A></div> <div> <A HREF="id101.htm" TARGET="_top" TITLE="TAXES"><U><B>TAXES</B></U></A></div> <div> <A HREF="id100.htm" TARGET="_top" TITLE="PROSPECTS"><U><B>PROSPECTS</B></U></A></div> <div> <A HREF="id92.htm" TARGET="_top" TITLE="Review Questions Module 2"><U><B>Review Questions Module 2</B></U></A></div> </td> <td valign="top" height=390 BGCOLOR="#FFFFFF" TEXT="#080000"> <div> <I><B>CASE STUDY</B></I></div> <bR> <div> <B>insert into Deferred Comp Arrangements — under Fixed Dollar Formula</B></div> <div> after ....enjoy popularity:<U>   In fact, in our case study at the conclusion of this course, we will examine a true deferred compensation plan with benefits specified in dollars at retirement.</U></div> <div> <B>online and print</B></div> <bR> <div> Nut and Bolt Fastener Company</div> <bR> <div> Often it is easier to understand a concept such as deferred compensation by looking at a representative case and see how deferred compensation can be applied to sole a prospect's problem. As we examine the deferred compensation case for Nut and Bolt Fastener Company, Inc. and its president, we need to keep a couple of points in mind:</div> <bR> <div> various types of financing may be used with deferred compensation plans, but life insurance has significant advantages; and</div> <div> deferred compensation plans may be arranged with either defined or variable benefits.</div> <bR> <bR> <div> Cap on 401(k) Contributions</div> <bR> <div> Webster Graham, age 46, is the president of the Nut and Bolt Fastener Co., Inc. (N&B). N&B is a successful medium-sized manufacturer, and Graham is well worth the <U>$150,000 salary and the $24,000 bonus he received last year.</U></div> <bR> <div> Graham is troubled by what he considers to be the relatively small amount that he is putting away for retirement. He takes maximum advantage of the N&B 401(k) plan. <U>In 2001, the maximum he could contribute was $10,500. </U>At Graham's income level, the 401(k) contribution amounts to only 6 percent of his earnings.</div> <div>  </div> <div>   </div> <div> Deferral of Future Bonuses</div> <bR> <div> Graham is also concerned by the amount of income tax he pays. He wonders whether there is some way he can increase his retirement savings and reduce current taxes.</div> <bR> <div> After discussion with his agent, Graham approaches the controlling shareholders of N&B with this proposition:</div> <bR> <div> "Instead of paying me all my bonus next year and in the following years as current compensation, defer the first $12,000 of any bonus until I retire."</div> <bR> <div> Retirement, Survivor and Disability Benefits</div> <bR> <div> The shareholders and Graham work out the following plan providing for retirement benefits, disability benefits and survivor benefits in return for Graham's partial bonus deferral:</div> <bR> <div> Retirement benefits—At age 65, N&B will pay Webster Graham $24,000 per year for 15 years. If he should die after he retires, but before N&B has completed its payments to him, the $24,000 per year payments will be continued to his wife or other beneficiaries for the remainder of the 15 years.</div> <bR> <div> Survivor benefits—If Webster Graham should die before he retires, N&B will pay $24,000 per year to his wife or other beneficiaries for 15 years. Thus, she is assured of receiving $360,000 whenever death occurs before retirement.</div> <bR> <div> Disability benefits—If Webster Graham becomes disabled before he retires, N&B will pay him an income of $24,000 per year, as long as he is disabled or until his age 65, when it will pay him a retirement income of $12,000 per year for 15 years.</div> <bR> <div> Insurance Purchased with Deferred Bonuses</div> <bR> <div> At the time the parties signed the deferred compensation agreement, N&B took the net cost of a $12,000 bonus, if paid today ($7,920 in the corporation's 34 percent tax bracket) and purchased two insurance policies on Graham. The policies are as follows:</div> <bR> <div> $175,000 life insurance policy designed to ensure that the funds will be available to meet its obligation to Graham's survivors and will produce cash values that can be accessed to pay retirement benefits. N&B is the owner and the beneficiary of the policy, so the policy values are solely its property, and the proceeds are payable only to it; and</div> <div> $1,000 per month disability income insurance policy, owned by Graham and paid for by N&B.</div> <bR> <div> Employee's Current Tax Savings</div> <bR> <div> Graham has achieved some tax gains from the deferral of the $12,000 bonus that might otherwise come to him as current compensation. His salary reduction approach to deferred compensation will result in tax savings on both the federal and state levels.</div> <bR> <div> He has reduced his current gross income from $174,000 to $162,000. Because he is in a 31 percent federal income tax bracket and a 7 percent state income tax bracket, his income tax liability is reduced by 38 percent of $12,000, or $4,560 each year.</div> <bR> <div> Declared-Rate Universal Life Insurance Policy</div> <bR> <div> Nut & Bolt has purchased a $175,000 declared-rate universal life insurance policy to offset its obligation to provide survivor benefits to Webster Graham's wife, Mary.</div> <bR> <div> Insurance ($175,000 plus cash value)   $286,700</div> <div> Less Premiums ($7,500 x 12)   $90,000</div> <div> Gain      $196,700</div> <div> Present Value of after-tax survivor payments  $172,634</div> <div> Net contribution to surplus $24,066</div> <bR> <bR> <div> How does N&B fare if Graham were to die in year 12 of the agreement? (We assume that the universal life insurance was purchased with an increasing death benefit and that N&B is, and will remain, in the 34 percent tax bracket.)</div> <bR> <div> Click here to see an excerpt from the policy illustration. ###########picutre</div> <bR> <div> Benefit to Survivor and to Business</div> <bR> <div> As we can see from these numbers, if the company had instituted a deferred compensation plan and Webster Graham died at age 58, after 12 years as a participant, N&B would have:</div> <bR> <div> paid a substantial survivorship benefit to Graham's widow;</div> <div> recovered all of its costs for both the benefits and the insurance premiums; and</div> <div> had a positive adjustment to surplus.</div> <bR> <bR> <div> Defining Employer Cost</div> <bR> <div> Note that the employer's cost for providing the survivor benefit is the present value of the after-tax survivor payments. The statement is a mouthful, but its meaning is relatively simple and incorporates two important facts: </div> <bR> <div> the survivor payments made by the employer are deductible from its income for tax purposes; and</div> <div> the death benefit is received by the employer before the survivor payments are made.</div> <bR> <div> Let's look at it more closely.</div> <bR> <div> Deductibility of Survivor Benefits</div> <bR> <div>  When the employer pays the annual survivor benefit of $24,000 to the employee's survivors under the deferred compensation agreement, the employer is entitled to an income tax deduction.</div> <bR> <div> In N&B's 34 percent federal income tax bracket, its after-tax cost to make the $24,000 payment is $15,840. [$24,000 × (1 zminus .34) = $15,840] The remaining $8,160 required by the employer to make the annual survivor payment comes from its income tax relief.</div> <bR> <div> Death Benefits Received before Payments Begin</div> <bR> <div> The second important fact with respect to deferred compensation plan payments made to survivors is that the death benefits are received by the employer before any payments are made to the survivor. This early receipt of the funds enables the employer to invest them at the prevailing rate of interest. As a result, the employer needs far less money on hand than the sum of the payments.</div> <bR> <div> Assuming that the employer could invest the death benefit funds at 8 percent, it could achieve an approximate after-tax return of 5 percent on those funds. So, the cost to the employer to make the 15 years of survivor payments of $24,000 is the present value of the future payments discounted at 5 percent. Because the first survivor payment is due immediately, the calculation is for the present value of an annuity due. (An annuity due is a sequence of uninterrupted, equal cash flows with the payments occurring at the beginning of each period, rather than at the end of each period as in an annuity.</div> <div> )</div> <bR> <div> Cost of Benefit</div> <bR> <div> An easy way to understand the calculation of the employer's cost for these tax-deductible $24,000 payments stretching for 15 years is to visualize them as comprising two pieces:</div> <bR> <div> the immediate payment of $24,000, which costs the employer $15,840 on an after tax basis; and</div> <div> a stream of 14 additional annual payments beginning one year after the employee's death.</div> <bR> <div> The after-tax employer cost for the 14 additional annual survivor payments is equal to the present value of an annuity at 5 percent for 14 years, because the employer could achieve an after-tax return on those invested death benefits equal to 5 percent. That present value is $156,794. The total present value of the after-tax cost for the survivor benefits is $172,634. ($15,840 + $156,794 = $172,634.)</div> <bR> <div> Click here to see an excerpt from a present value table. #############picutre</div> <bR> <div> Business Benefits</div> <bR> <div> Let's compare this result for N&B with the result if had Graham continued to take the deferred $12,000 bonus as current compensation and died in year 12.</div> <bR> <div> Bonuses — $12,000 x 12   $144,000</div> <div> Les: N&B's tax deduction   $48,960</div> <div> Net change to surplus    $95,040</div> <bR> <div> Instead of achieving the positive adjustment to surplus of $24,066 found in the insured deferred compensation plan, N&B would have reduced its surplus by $95,040. That is a difference of $119,106. N&B's financial position would have been worse by almost $120,000. It is evident then that N&B also benefits from this insured compensation plan.</div> <bR> <div> Life Insurance Used to Pay Retirement Benefits</div> <bR> <div> Life insurance certainly plays an important role in enabling the employer to pay survivor benefits. But life insurance has an equally important place in helping the employer to pay the employee the retirement benefit.</div> <bR> <div> In the typical deferred compensation case, the employer makes tax-free cash value withdrawals from the policy to pay the retirement benefit until the sum of the withdrawals equals the sum of the employer's aggregate premiums. When that point is reached, the employer ceases taking withdrawals and begins taking policy loans.</div> <bR> <div> Let's look at how the universal life insurance policy that N&B purchased to informally fund the deferred compensation plan for Webster Graham would perform to help N&B meet its retirement obligations under the plan.</div> <bR> <div> Illustration of UL Policy Before Retirement</div> <bR> <div> During the period until Webster Graham retires, the universal life insurance policy is illustrated to perform as follows:  ########picture</div> <bR> <div> Illustration of UL Policy Before Retirement</div> <bR> <div> Webster Graham retires upon reaching age 65, and N&B begins accessing policy values to pay his retirement benefit. The universal life insurance policy is illustrated to perform during this period as follows:</div> <bR> <div> Switch to Policy Loan</div> <bR> <div> Beginning at Graham's age 65, N&B ceases premium payments and begins taking an annual $15,840 withdrawal from the cash value of the policy. By the end of year 8 of Graham's retirement, the employer has taken a total of $126,720 in cash value withdrawals. Because the employer's cost basis is $135,000, it may only take an additional $8,280 in tax-free withdrawals. ($135,000 zminus $126,720 = $8,280) Any further withdrawals would result in taxable income to N&B.</div> <bR> <div> At the point where total cash value withdrawals equals the policy's cost basis, the employer stops taking withdrawals and begins taking policy loans. So, in year 9, N&B will also take a policy loan for $7,560 in addition to the $8,280 withdrawal to make the $15,840 needed to make the retirement payment to Graham.</div> <bR> <div> In each of the remaining six years following the switch from cash value withdrawals to policy loans, N&B will continue to take policy loans. During Webster Graham's retirement years, the policy's cash value and death benefit have continued to decline as withdrawals and loans are taken.</div> <bR> <div> Death After Years of Retirement</div> <bR> <div> Despite the reduction in cash values and death benefits resulting from the withdrawals and policy loans, the death benefit that would be payable to N&B if Graham died immediately at the end of the 15 years of retirement payments is $197,369. Because N&B's total premiums for the policy amounted to $135,000, Graham's death at that time would enable N&B to recover all of its premium costs and enjoy a positive adjustment to surplus amounting to $62,369. All of the benefit payments made to Graham have come from the policy's cash values, rather than from N&B's other assets.</div> <bR> <div> Remaining tax-free death benefit payable at the end of 15 retirement years  $197,369</div> <div> Less: N&B's total life insurance premium costs    $135,000</div> <div> Contribution to surplus   $62,369</div> <bR> <div> Taxable Income if Policy Is Surrendered</div> <div> It is important that N&B maintain the life insurance policy in force until Webster Graham's death, not only to recover its costs, but also to avoid the problem of phantom income.</div> <bR> <div> Because N&B has taken $237,600 from the policy's cash value ($15,840 × 15 = $237,600) and has a policy cost basis of only $135,000 ($7,500 × 18 = $135,000), N&B's surrender of the policy would result in their recognizing taxable income. The income that would need to be recognized is $102,600, the difference between the accessed cash and the aggregate premium paid.</div> <bR> <div> Disability Insurance</div> <bR> <div> It should be clear that life insurance plays an important role in the deferred compensation plan. But, life insurance is not the only insurance purchased to facilitate the plan; the disability benefit should also be provided. To provide for the disability benefit, disability income insurance is applied for.</div> <bR> <div> To fund the disability benefit with disability income insurance, the policy may be owned either by N&B or by Webster Graham. In this case, to enjoy the benefit of income tax deductibility, N&B has decided to make the premium payments on a disability income policy owned by Graham. Not only are the premium payments deductible by the employer, the premiums are not considered income to Graham. The disability benefits, if and when received by Graham, would be taxable income.</div> <bR> <div> Payment of Disability Benefit</div> <bR> <div> In the event that Graham becomes disabled before his retirement, the disability income policy will pay a monthly benefit of $1,000 ($12,000 annually). The remaining $12,000 would be paid annually directly by N&B.;</div> <bR> <div> Because the premiums for the life insurance would have been waived pursuant to the waiver of premium benefit, N&B will be able to divert those non-deductible premiums to pay the deductible benefit to Graham.</div> <bR> <div> Summary</div> <bR> <div> In this lesson we examined the deferred compensation arrangement for Webster Graham, the president of Nut & Bolt Fastener Co., Inc. We focused on the operation of the life insurance policy used to formally fund the plan and analyzed the cash flow and effect on corporate surplus of both the payment of survivor benefits and the payment of retirement benefits. Finally, we looked at the role of disability income insurance in guaranteeing the disability benefit promised in the deferred compensation agreement.</div> <bR> <div> ———-</div> <div> How did N&B benefit from the insured deferred compensation plan? </div> <div>  </div> <bR> <div>    </div> <div>  The life insurance death grew to an amount that was greater than the sum of its obligation to Graham and the accumulated premiums.</div> <div>  </div> <div>  It received a tax deduction for the life insurance premiums.</div> <div>  </div> <div> That's correct. </div> <div> N&B is the owner and beneficiary of the life insurance policy. The obligation to pay Graham is independent of that life insurance. If the value of the insurance policy exceeds the obligation, the employer' surplus is increased by the difference.</div> <bR> <bR> <div> What action is generally taken when the sum of cash value withdrawals used to pay deferred compensation retirement benefits equals the policy's cost basis?</div> <div>  </div> <bR> <div>    </div> <div>  Employer switches to policy loans</div> <div>  </div> <div>  Insurance policy is transferred to the plan participant </div> <div>  </div> <div>  Insurance policy is surrendered for cash</div> <div>  </div> <div>  Remaining cash value is placed under a settlement option</div> <div>  </div> <div>  </div> <bR> <div> At the point where total cash value withdrawals equals the policy's cost basis, the employer stops taking withdrawals and begins taking policy loans.</div> <bR> <bR> <bR> <div> —————————————————————————————————————————————————————————-</div> <div> <B> </B></div> <div> <B>How an Agreement Is Documented</B></div> <div> A sample deferred compensation agreement is provided in its entirety to illustrate how the concepts in this course are documented. Follow the links provided to see how the agreement works.</div> <bR> <div> It is important to bear in mind when working with a deferred compensation prospect that the facts and circumstances of a particular case may require some changes to the sample document. In fact, the applicable state law may dictate additional modifications. Because the proper sale and documentation of a deferred compensation plan involves a number of major tax decisions, legal counsel should always be employed. Counsel will not only assist in reaching these decisions, but should also prepare the deferred compensation agreement itself.</div> <bR> <div> Because we have already looked at the motivation for Webster Graham and Nut & Bolt to enter into a deferred compensation agreement, let's look at the agreement that they might have drawn.</div> <bR> <bR> <bR> <div> <I><B>Sample Deferred Compensation Agreement</B></I></div> <bR> <div>  Agreement entered into as of the 1st day of June, 2001, between Nut and Bolt Fastener Co., Inc., a domestic corporation having its principal office in Chicago, IL (hereinafter referred to as the "Company") and Webster Graham (hereinafter referred to as the "Employee"), president of the Company.</div> <bR> <bR> <div> WITNESSETH THAT:</div> <bR> <div> WHEREAS, the Employee has rendered the Company many years of valuable service; and</div> <bR> <div> WHEREAS, it is the desire of the Company to have the benefit of his continued loyalty, service and counsel and also to assist him in providing for the contingencies of disability, death and old age dependency, it hereby is agreed:</div> <bR> <div> 1. DISABILITY BENEFIT—Should the Employee, before the 15th day of June, 2020, while in the employ of the Company, become totally disabled, resulting from bodily injury or disease, which wholly prevents the Employee from performing his regular duties as an Employee, the Company (beginning at a date to be determined by the Company but within six months from the date of disability) will commence to pay him $2,000 per month for the duration of the disability, or until the Employee reaches age 65, or until the Employee's death, whichever occurs first. (The total and irrevocable loss of the sight of both eyes, or the use of both hands, both feet, or one hand and one foot will be regarded as total disability in any event.)</div> <bR> <div> 2. DEATH BENEFIT—Should the Employee die before the 15th day of June, 2020, while in the employ of the Company (subject to the provisions of paragraph hereof), the Company (beginning at a date to be determined by the Company but within six months from the date of death) will commence to pay $2,000 per month for a continuous period of 180 months to Employee's wife Mary Graham (hereinafter referred to as the "Beneficiary"), otherwise to the Executors, or Administrators of the Employee. The Employee, with the agreement of the Company, may change the Beneficiary named herein at any time by written amendment. The benefit shall not be payable for death of the Employee resulting from suicide, whether sane or insane, within two years after signing the agreement.</div> <bR> <div> 3. RETIREMENT BENEFIT—Should the Employee still be, for purposes of this agreement, in the employ of the Company upon the 15th day of June, 2020, the Company (beginning on a date to be determined by the Company but within six months from such retirement date) will commence to pay him $2,000 per month for a continuous period of 180 months. In the event that the Employee should die after said payments have commenced but before the expiration of said 180-month period, the remaining payments due will continue to be paid by the Company to those beneficiaries designated in paragraph 2 above.</div> <bR> <div> 4. CONDITIONS—The provisions of paragraph 3 are conditional upon the continued employment of the employee by the Company (including periods of total disability described in paragraph 1 and subject to the provisions of paragraph 5 hereof) until the 15th day of June, 2020, or his death, whichever is sooner, and upon the further condition that, during the period that retirement payments are made, the Employee shall not engage in business activities that are in competition with the Company without first obtaining written consent of the Company.</div> <bR> <div> 5. LEAVE OF ABSENCE—The Company may, in its sole discretion, permit the Employee to take a leave of absence for a period not to exceed one year. During this time the Employee will be considered to be still in the employ of the Company for purposes of this agreement.</div> <bR> <div> 6. ACCELERATION OF BENEFIT PAYMENTS—The Company hereby reserves the right to accelerate the payment of any of those sums specified in paragraphs 1, 2 and 3 above without the consent of the Employee or the Employee's estate, beneficiaries, or any other person claiming through or under him (her).</div> <bR> <div> 7. ASSIGNABILITY—Except to the extent that this provision may be contrary to law, no assignment, pledge, collateralization, or attachment of any benefits under this agreement shall be valid or recognized by the Company. </div> <bR> <div> 8. EMPLOYMENT RIGHTS—This agreement creates no rights in the Employee to continue in the Company's employ for any specific length of time, nor does it create any other rights in the Employee or obligations on the part of the Company, except those set forth in this agreement.</div> <bR> <div> 9. LAW GOVERNING—This agreement shall be governed by the laws of the State of _____________.</div> <bR> <div> THIS AGREEMENT is solely between the Company and the Employee. Further, the Employee and his (her) beneficiaries shall have recourse only against the Company for enforcement. However, it shall be binding upon the beneficiaries, heirs, executors and administrators of the Employee and upon the successors and assigns of the Company.</div> <bR> <div> EXECUTED as of the day first written above.</div> <bR> <div> COMPANY</div> <bR> <div> _________________</div> <bR> <div> By: ___________________</div> <bR> <div> Title: __________________</div> <bR> <div> _________________</div> <bR> <div> EMPLOYEE</div> <bR> <bR> <div> <I><B>Resolution Adopting a Deferred Compensation Plan</B></I></div> <bR> <div>  WHEREAS, a deferred compensation agreement has been executed with Webster Graham, President of this corporation, whereby he is entitled to have his salary continued in a reduced amount for 15 years, commencing at age 65 , should he remain in the service of this corporation until that time and meet certain specified conditions thereafter; and</div> <bR> <div> WHEREAS, the corporation recognizes that some immediate plans should be formulated to place itself in a financial position to be able to meet this future contingency; and</div> <bR> <div> WHEREAS, it is deemed advisable by the Board of Directors of this corporation that the life of Webster Graham, President of this corporation, be insured for the purpose of protecting this corporation from loss in the event of death and disability of said Webster Graham.</div> <bR> <div> THEREFORE, Be It Resolved that the treasurer of the corporation be authorized and instructed to take such action and execute such papers as may be necessary to:</div> <bR> <div> Secure a policy or policies of life insurance in the _____________ (company or companies) on the life of Webster Graham having a total face value $175,000. with the corporation to be named as beneficiary of such policy or policies and to be the owner of same; the policies so obtained shall be of the universal life type; and</div> <bR> <div> Resolved Further, that said Webster Graham shall not have any rights whatsoever in said policy; that all dividends, accumulations, and other benefits accruing from said policy shall belong and be payable to this corporation; and that this corporation shall undertake to pay the premiums upon such policy as they become due and payable during the life of said Webster Graham; and </div> <bR> <div> Resolved Further, that the board of Directors shall have the right to surrender the insurance taken out on the life of said Webster Graham at any time, and to receive for the benefit of this corporation the cash surrender and other values of the policy.</div> <bR> <div> Resolved Further, that the treasurer of the corporation be authorized and instructed to take such action and execute such papers as may be necessary to:</div> <bR> <div> Secure a disability income policy or policies covering said Webster Graham in the ________________ (company or companies).</div> <bR> <div> Ratification by Board of Directors</div> <div> A company's board of directors might ratify the agreement in the following form:</div> <bR> <div> Resolved, that the payments due said Webster Graham or his (her) beneficiaries at the time of his (her) retirement or death, or disability be fixed as provided for in a deferred compensation agreement executed and dated _____________. </div> <bR> <div> _______________________________________</div> <bR> <div> President</div> <bR> <div> _______________________________________</div> <bR> <div> Secretary</div> <bR> <bR> <div> <IMG SRC="13f53d60.gif" border=0 width="595" height="470" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> <IMG SRC="14153790.gif" border=0 width="595" height="377" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div> <IMG SRC="14253de0.gif" border=0 width="595" height="478" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <TABLE BORDER="2" CELLPADDING="2" CELLSPACING="1" WIDTH="76" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" ALIGN="BOTTOM" HSPACE="0" VSPACE="0" BGCOLOR=#FFCC66 > <tR> <tD VALIGN=TOP HEIGHT= 23 WIDTH="64"><div> <A HREF="id92.htm" TARGET="_top" TITLE="Review Questions Module 2"><U><B>NEXT</B></U></A></div> </tD> </tR> </TABLE></div> <div> <I><B>  </B></I></div> </td> </tr></table></body>