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.