Structuring Indemnification Escrows for Executive Protection
Structure executive indemnification escrows as bankruptcy-remote grantor trusts with non-discretionary five-day advancement mandates to insulate defense funds.
Tax Gross Up
Meaning
Payment adjustments increase the amount of a disbursement to ensure that the recipient receives a specific net sum after all taxes have been deducted. Implementing a tax gross up is common in executive compensation packages or international loan agreements to protect the recipient’s expected income from tax changes. This practice shifts the burden of taxation from the payee to the payer.
Payment Calculation
The math requires calculating the tax liability on the grossed-up amount itself, as the tax payment is also treated as taxable income. The tax gross up formula must account for the recipient’s marginal tax rate and any applicable deductions. This complexity ensures that the final net payment matches the agreed amount.
Contractual Agreement
These clauses must be clearly defined in the employment or loan documentation to avoid disputes over the calculation method. When a tax gross up is activated, it must specify which taxes are covered, such as federal, state, or foreign withholding taxes. This detail prevents the payer from being exposed to unexpected tax liabilities.
Corporate Expense
The practice increases the overall cost of the transaction or compensation package for the paying organization. This additional cost must be budgeted for during the planning phase of the agreement.