Split Dollar Insurance Article

[waid10]

Can anyone recommend a good article laying out Split Dollar Insurance? Specifically the advantages and disadvantages?

I have read a few articles and they all seem to paint a picture that Split Dollar is a great device. However, people I speak with are absolutely against Split Dollar. I need some good articles by experts that will help explain to me the downside.

Thanks.

[GBurns]

Use a Google search. There are many articles from the major benefits lawyers that give either both sides or warnings. Stockton Kilpatrick, Reish Luftman, Groom, E. Lynn Nichols come to mind. There are also very old predictions of the eventual IRS actions by www.taxprophet.com

[waid10]

Use a Google search. There are many articles from the major benefits lawyers that give either both sides or warnings. Stockton Kilpatrick, Reish Luftman, Groom, E. Lynn Nichols come to mind.

I checked the firms you mention and there are no complete articles that lay out the benefits and drawbacks of Split Dollar Insurance. I have tried searching on the internet, and there are a ton of hits. However, none of the articles I have found say much about disadvantages to Split Dollar.

Can anyone help?

Thanks.

[mbozek]

The disadvantages in using split dollar are economic in nature and can only be discerned at the end of the investment period. You need to know how long the funds will be invested, the charges for the death benefit during the investment period, the rate of return and the admin charges in order to determine if it will be good investment after the applicable taxes are paid. These factors cannot be predicted in advance. Also most of the articles were written before recent changes in the tax law limited taxation of capital gains and dividends to a maximum of 15% and the tax rates were reduced to a maximum of 35%.

[waid10]

The disadvantages in using split dollar are economic in nature and can only be discerned at the end of the investment period. You need to know how long the funds will be invested, the charges for the death benefit during the investment period, the rate of return and the admin charges in order to determine if it will be good investment after the applicable taxes are paid. These factors cannot be predicted in advance. Also most of the articles were written before recent changes in the tax law limited taxation of capital gains and dividends to a maximum of 15% and the tax rates were reduced to a maximum of 35%.

Thanks. As a shareholder in a business, I am looking at ways to fund a cross-purchase agreement. I think I will take out insurance on the life of my business partner to fund the purchase of his company shares if he dies. He will do the exact same on my life. We looked at term policies. However, our insurance provider is touting Split Dollar insurance. Our company would pay the annual premium and we are told that the cash surrender value can immediately be loaned back to the company. If my business partner dies in year 1, the company would receive the remainder of the premium as a death benefit. So the company would always be insured to receive its entire cash outlay. Over time, the death benefit to the company will exceed the premium cash outlay. Also, we are told that the company borrowing back the cash surrender value does not preclude the company from receiving its full death benefit, net of any amounts borrowed.

I would have income imputed to me every year at an ever-increasing amount. Is that the biggest disadvantage?

The numbers that have been provided to me show that over the first 10 years, the term policy will cost nearly double in premiums as the split dollar policy (if you only look at the difference between the premium payments and the cash value available to be borrowed back).

This just seems too good to be true. That is why I wanted to read why experts are down on split dollar plans.

Anyone have any good sources?

Thanks.

[mbozek]

While I leave the financial analysis of insurance policies to advisors who specialize in this area I know that an ins co cannot guarantee the inside buildup or cash surrender in any ins policy for a 10 year period and cannot guarantee dividend payments beyond the current year. Maybe experts are down on SD because of the projections used by Ins co. to market it.

[Mark Whitelaw]

Waid10 – There are two forms of split dollar and your description of your options appears to be blurring the two. Let me try and give a condensed summary of the two.

Loan Regime – You own the policy. Your company loans you the money to pay the premiums (assumes you are not a shareholder of a public company or subject to Sarbanes-Oxley). Each loan and its loan rate are recorded. The company has rights to cash value and death benefit to secure its loan with interest in the policy. Your risk is the cash value doesn’t exceed the debt and you remain underwater.

Economic Benefit Regime – The company owns the policy on your partner and splits some of the death benefit with you. You receive an annual imputed income based upon the amount of the death benefit you are entitled and your partner’s age. Your cost is the tax on the imputed income. Your comparative is your tax cost compared to purchasing a separate policy on your partner. Your risk is your partner lives to a really old age and/or your tax rate increases.

Alternatives – You purchase the contract with your own money—no company involvement or, the company bonuses each of you an amount each year to help with premium payments.

There are a handful of institutionally designed life insurance contracts designed for business continuity issues that have low fees, no surrender charges and priced based upon executive mortality, not the general population and charges seen in retail life insurance. They typically generate over 100% cash value to premium that make personal ownership options more palatable than split dollar or can lessen the risks associated with split dollar. They also provide greater value than participating in a nonqualified deferred compensation plan, but that’s a different topic. You have a business continuity issue. Solve it with coverage priced for business solutions.

[E as in ERISA]

"Split dollar" is a term covering a wide variety of arrangements, some of which the IRS doesn't like very well (especially where the policy is structured so that significant economic benefit is being transferred from the employer to the employee purportedly without any taxation). Try including some extra terms like "reverse" and "collateral assignment" and "endorsement" in your google search in order to snag some of the articles that discuss the tax issues. See

http://www.websterrogers.com/facts_ideas/f...ndorsement'

or

http://eupdate.luce.com/taxation/0104.pdf#...t%20dollar'

or

http://401kpsp.com/splitdollardtl.htm

[GBurns]

A few :

http://www.kilpatrickstockton.com/publicat...il.aspx?ID=1013

http://www.pwc.com/extweb/pwcpublications....o.3%20F1021.pdf

http://www.plantemoran.com/news/latest_detail.asp?id=161

http://www.aicpa.org/pubs/jofa/jun2003/alexand.htm

http://www.bkadvice.com//bkb/finditem.cfm?itemid=1352

http://www.bkadvice.com//bkb/finditem.cfm?itemid=1059

http://www.newjerseylaw.com/pubs/irstaxes.htm

http://www.elkin.com/split_dollar_rules_ir...ts_it_right.htm

http://www.mwe.com/info/news/ots0102b-2.htm

http://www.reish.com/publications/pdf/busadvnov03.pdf

Refining the search terms would have returned more specific articles. Try adding "disadvantages" "death" etc. tp "split dollar".

You should be aware that there is no such thing as a "split dollar policy" Split dollar is a "funding arrangement" that can be used with any type of policy. It is neither a type of policy nor a type of insurance. Take note of Mark Whitelaw's post.

By the way Why only 10 year Term? What about 30 year or Term to 95 or even minimum funded UL? If you get the term or alternative quote from the same person, How are you sure that the dice is not bieng loaded against you?