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Spilt Dollar Life


Guest ramassa

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Guest ramassa

I am just becoming familiar with Spilt Dollar Life as used in SERPs. Having just read about, I can't see any downsides about using it. Any tips on when it is better to fund SERPs or 457(f) plans without such an arrangement? (Any reference material suggestions would be appreciated)

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  • 2 months later...

Split dollar has been somewhat common in non-profits for funding SERP-type liabilities. It has been used infrequently in taxpaying entities, although promoted a great deal. There are a number of logistical issues that in practice, make it difficult to employ.

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Jim Clary

jclary@mcg-chi.com

(847) 374-1000

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  • 3 weeks later...
Guest Robin Davis

Jim, maybe you can clarify for me how a split dollar policy would provide the tax advantages that make a SERP work? The executive will be taxed on the economic benefit of the policy, right? So, doesn't that reduce the advantages of a SERP to the executive?

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Robin Davis

D&D Benefits, L.L.C.

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Split dollar has been used by both not-for-profits and public companies extensively for funding non-qualified benefits. The key advantage is that benefits, in the form of participant-owned cash value, can be transfered to participants without current taxation/constructive receipt. There is reportable income for the current economic benefit of the policy, however, this benefit is measured by the death benefit, not the cash value. Such income is usually low in comparison to the cash value.

In our audit practice, the primary probles with split dollar are: 1) poor policy performance (much of this is caused by excessive broker commissions) 2) lack of understanding on the part of employer on the financial/legislative/administrative risks of split dollar 3) inadequate financial/administrative management techniques in place by employer and/or broker.

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Guest Robin Davis

Thank you for the information, kkirk. The company's I worked for prior to going out on my own have traditionally used straight COLI to fund the Salary Deferred Comp Plan's and "penion like" SERP's and used Split Dollar as a stand alone plan.

Here's another question - wouldn't the split dollar policy secure the benefit since the participant owns the cash value - thus making the SERP a funded plan?

Also, in a traditionally funded "pension like" SERP the company pulls money from the policy to pay the benefit to the participant. So if the cash value is owned by the participant, what is the company using to pay the benefit? Or are they treating the Split Dollar policy as the benefit and not offering salary continuation payments?

I wonder how old the policies are on which you are seeing poor performance. I mention this because some of the newer plans that I have worked on and the ones that I have designed myself and used COLI to fund have produced high cash values in the early years, often exceeding cumulative premiums by year 4 or 5. I remember when some of the plans from the early 90's took up to 7-10 years to exceed cumulative premiums!

Your second and third point though are right on! Hopefully I, as well as the company you work for and several others, can help alleviate those problems!

Thanks again for your comments and I look forward to hearing more!

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Robin Davis

D&D Benefits, L.L.C.

972-755-3327

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Guest Robin Davis

Kirk, you mentioned that funding nonqualified benefits with life insurance is substantially down in your practice. Would you mind sharing with me what vehicle you are currently using and how it compares to the tax advantages of life insurance?

As a Benefit Specialist, and not an insurance salesperson, I feel that it is important for me to be fully aware of all options. Unfortunately, I haven't yet found a vehicle that matches the tax benefits of a life insurance policy.

I look forward to your comments!

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Robin Davis

D&D Benefits, L.L.C.

972-755-3327

[This message has been edited by Robin Davis (edited 01-06-2000).]

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