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Smith Enterprises establishes an ESOP, a qualified retirement plan. It will make tax deductible contributions to this plan annually based on payroll. |
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Thomas sells $3,750,000 of his stock to the ESOP. The company could arrange to finance this transaction with a lender. Alternatively, as in this illustration, Thomas finances the transaction personally by accepting a note in exchange for the stock. The note will bear interest of 8.5% and be amortized over 7 years. |
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Richard elects to reduce his compensation to $495,000. This will help the company finance the other elements of the overall arrangement. Despite this reduction, his total income from all sources will increase. |
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Smith Enterprises contributes $200,000 annually for 5 years to an incentive compensation plan. |
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Thomas receives future distributions from the incentive compensation plan. Thomas will receive 5 annual distributions from this plan beginning 6 years from the inception of the plan. We estimate the total gross compensation paid to Thomas over this time to be $1,772,000. |
There is no guarantee that cash values will be available to offset all or even part of the Repurchase Liability.
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