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Beware Leveraged Compensation and Accounts Receivable Financing Programs
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Beware the dishonest arguments made to sell
leveraged compensations programs
Dishonest Argument
There is a positive arbitrage between the simple interest rate paid
on the loan against the A/Rs versus the compound interest received
within the annuity product.
The Truth
The amount of the interest payments made would have compounded had
the business owner not taken the loan and simply invested the amount of
the payments. This "lost opportunity" exactly cancels the benefits of
compounding within the annuity product.
Dishonest Argument
There is nothing that a creditor can do to get at the A/Rs because
of the UCC-1 filing.
The Truth
A creditor can execute and foreclose on the A/Rs, which would force
the loan to be repaid and any value above the amount of the loan and any
future A/Rs collected would go to the creditor.
The Truth About
Leveraged Compensation Programs
So-called Leveraged Compensation
Programs are sold to business owners for the purported dual
reasons of protecting their accounts receivables from
creditors and creating additional wealth for retirement.
Because most of these programs require that the
business owner take a loan against the accounts receivable, these
programs are commonly known as "accounts receivable financing programs",
or "A/R financing" for short.
In a nutshell, here is how leverage compensation
programs work:
A loan is arranged against the accounts
receivables.
The loan proceeds are distributed to the
business owner.
The business owner uses the loan proceeds to
purchase a cash-value annuity.
The lender takes the accounts receivables for
collateral for the loan and places a UCC-1 lien on the accounts
receivables.
The lender takes the cash-value of the annuity
as additional collateral for the loan.
The business makes interest payments on the
loan.
The value of the annuity grows tax-deferred.
If a creditor of the business appears, the
creditor cannot collect against the accounts receivable because of
the lender's UCC-1
At retirement, the business owner uses the
assets of the business to finally pay off the loan, and then draws
against the annuity to fund retirement needs.
Sounds good? Ah, if it all actually worked that way
. . . .
There are many problems with leveraged compensation
programs. Some of these programs can be fixed by better program designed
-- and there is no doubt that some of the programs are better than
others -- but many are latent defects that can never be fixed.
Here are some of the most significant defects of
leveraged compensation programs:
If the loan interest rate is too high, the
program may actually go in reverse, i.e., the loan payments will
exceed the earnings of the annuity so that the business owner ends
up worse off than if the program had never been implemented.
Many programs have
variable interest rates that can quickly rise to a level that will
wipe out any arbitrage benefits --
programs with variable loan rates should
absolutely be avoided.
It is highly uncertain whether the loan interest
payment is deductible to the business. If the loan interest payment
is not tax-deductible, then the program is unlikely to be tax
efficient since the investment growth within the annuity will be
taxable as ordinary income when taken by the business owner.
Most programs will allow the loan to be called
at any time by the lender. If the business or the business owner
gets into trouble, the lender may call the loan by taking the cash
value of the annuity, which would terminate the loan and the UCC-1
and thus expose the accounts receivables to creditors.
Any wealth remaining at the business owner's
death is trapped in the estate and subject to combined income taxes
and estate taxes that could reduce the amount of accumulated wealth
in the annuity by as much as 80%.
The effects of the arbitrage between the
interest carry on the loan and the investment return within the
annuity will not be significant for many years, at least 12, and
therefore these programs are unsuitable for business owners who plan
to retire within a decade.
The creditor may foreclose on the accounts
receivables, and although the existing receivables will go to reduce
the loan, any value of the accounts receivables above the loan
balance and any future receivables will be exposed to creditors.
In other words, whether leveraged compensation
programs actually work for business owners is subject to very
significant question. Things are not helped by the fact that leveraged
compensation are typically sold to business owners by life insurance
agents who probably understand their annuity products well enough, but
simply have no idea about these other issues.
 BILLING
& COLLECTION COMPANY
( BICOCO )
A Billing & Collection Company ( BICOCO
or "Bee-Koh-Koh" ) is a company that is inserted between a
business and its customers to facilitate the billing and
collection of accounts receivables. The company is used to
lawfully divert profits from the business. The goal is to
keep the business from accumulating profits that would be
available to creditors of the business.
The BICOCO can also be structured with
other planning such that the diverted profits are moved
outside of the business owner's estate.
The BICOCO is a much preferred
alternative to so-called Accounts Receivable Financing
Programs a/k/a Leveraged Compensation Arrangements,
since there is no interest cost, nor is the client forced
into purchasing an annuity as collateral. And unlike
Accounts Receivable Financing Programs, the BICOCO does work
to provide substantial asset protection and wealth
accumulation advantages.
The
All-Time Bestseller
on Asset Protection Planning
by Jay Adkisson and Chris Riser
Asset Protection:Concepts & Strategies,
by Jay D. Adkissonand Christopher M. Riser
Available at
Amazon.com
and
Barnes & Noble
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- - - - - -
The
All-Time Bestseller on
Captive Insurance Companies
by Jay Adkisson
Adkisson's CaptiveInsurance Companies,
by Jay D. Adkisson
Available at
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NEW CLIENTS
Those desiring to be clients of
the firm should call
949.629.1176
to schedule a brief free call
with a partner of the firm. We do not answer general
questions by phone. General questions directed to
the firm should be e-mailed to:
questions >at< risad.com
Dishonest Argument
Instead of receiving distributions from the business now, the
business owner will be better off drawing against the tax-deferred
payments from the annuity in the future.
The Truth
The business owner would be better to take current distributions
from the business at long-term capital gain rates, as opposed to taking
later payments from the annuity at higher income tax rates. Also, taking
current distributions allows the business owner to engage in estate
planning to remove the value of the payments from the estate, as opposed
to an annuity which traps the accumulated value in the estate.
The
BICOCO Advantages
Compared to A/R Financing Programs
Accounts receivable are protected from
creditors
Protection is highly uncertain
Future receivables are also protected
Protects existing A/Rs only -- no protection
for future receivables after creditor executes
on existing A/Rs and forces foreclosure
No loan / Credit unaffected
Program requires loan of significant
percentage of value of A/Rs. Substantial credit
must be used to obtain the loan that will
purchase the annuity product
No payments required / No effect on
liquidity, and wealth built up in the BICOCO may
be used to solve short- or long-term liquidity
needs
Monthly payments required whether business
has liquidity to make payments or not, and
liquidity is reduced by amount of loan payments
No third-party can discontinue the
arrangement
Bank can call loan on A/R financing program
at any time, thus causing the program to
terminate and exposing assets
Not a fraudulent transfer
Usually a fraudulent transfer
Significant potential estate tax advantages
Value of plan trapped in owner's estate
Not a tax shelter
Where business is
deducting the interest paid on the loan, this is
possibly a tax shelter
No requirement to purchase any life insurance
or annuity product
Purchase of annuity or life insurance
product absolutely required to provide loan
collateral
Easy to unwind
Difficult to unwind / promoters usually
charge significant fees upon termination
It is these reasons why the BICOCO has
become the preferred choice among sophisticated clients and
top advisors as opposed to the deeply-flawed A/R financing
programs.
The BICOCO is available to new and
existing clients of our firm. Please
contact us for more information.
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