Employee Benefits

by William F. Fischbach

Split-dollar life insurance programs have long been a cornerstone of advanced benefit planning because of their unique tax attributes.

"Split dollar" is a method by which an employer and employee can share the premium payments and benefits of a life insurance policy. Since the concept allows for great flexibility, adaptability and tremendous creativity, split-dollar programs are highly suited to meet the needs of both business owners and employees.

Revenue Ruling 64-328 outlined the income-tax consequences which brought split dollar to life back in 1964.

In the beginning, split dollar was used primarily as a means to provide a personal death benefit for valuable employees.

However, with the advances in software technology and the advent of flexible and progressive insurance products, split dollar has entered a whole new realm of utilization and significance.

The four leading types of split-dollar programs are: collateral assignment, endorsement, split owner and reverse. Within what may seem to be a small number of split-dollar styles is a virtual treasure chest of planning tools and options.

The applications extend far beyond solving business needs and cross into solving some of the most sophisticated advanced personal planning needs. Some of the design opportunities include personal supplemental retirement planning, estate planning, business continuation, deferred compensation and severance benefits.

Split-dollar insurance affords business owners and top management executives alike the use of the corporate purse to solve a myriad of financial concerns, while also providing tax-favored funding for business agreements. The splitting of policy ownership and funding allows the employer to keep a tight hold on the policy reins.

In essence, the planning attaches a string to the valued employee frequently referred to as "golden handcuffs." At the same time, split-dollar programs typically strengthen employee loyalty to the company by providing an attractive fringe benefit.

Since split-dollar programs use permanent insurance products, the employer can always experience a complete return of premiums paid (i.e. cost recovery) and can even design the program for a return of premium plus a reasonable rate of return on those premiums.

If necessary for business purposes, the employer also has the ability to access the "investment" in the policy such as loan security and retains such investment in the policy for business valuation and bookkeeping purposes. The employer also can combine this policy with other business needs, such as key-person insurance, in case of premature death of the employee, and establishment of an unsecured account to provide nonqualified deferred compensation or a severance benefit. Receipt of life insurance benefits may also "complete" a stock redemption for the employer/owner.

Employees also realize many benefits with split-dollar programs:

?Receipt of a personal insurance program on a tax-advantaged basis.

?Possible tax-favored accumulation of wealth (policy "equity") for future use, such as supplemental retirement income or family emergencies.

?Ability to benefit from corporate liquidity to finance life insurance in an irrevocable trust for estate-planning purposes.

?Use of insurance death benefit to fund a cross-purchase buy-sell agreement.

?Portability of policy after termination of split-dollar agreement.

Some specific and common examples of the power of split dollar and its flexibility include:

?Owner needs personal life insurance but has limited cash flow.

?Business has sufficient cash on hand, but owner does not want to increase personal income-tax liability.

?Owner is the controlling shareholder and president.

?Owner has sizable estate subject to significant estate shrinkage from estate taxes upon deaths of owner and spouse.

?Owner would like a second-to-die policy but lacks liquidity.

?Owner's attorney wants to keep insurance proceeds out of taxable estate, but has concerns about the fact that owner is also controlling shareholder.

?To finance business ventures, Business borrows $XYZ from bank. As a condition of the loan, bank is requiring company to purchase a $XYZ key-person insurance policy on the life of business president/owner. Business owner also needs a supplemental retirement benefit.

?Owner has made maximum contributions to the defined contribution qualified retirement plan.

?Business owner wants to accumulate more retirement funding, preferably on a tax-advantaged basis.

?Executive has taken maximum advantage of available retirement vehicles and wants a tax-advantaged supplemental program.

?Executive is also key to the continued success of business.

?Additionally, employer has an objective to further strengthen executive loyalty.

All of these examples fall into the split-dollar arena. The specifics of each program can be designed down to the last details of need, want and desire.

Split dollar is unquestionably the insurance program for the 21st century.

(William F. Fischbach is an account executive specializing in designing corporate executive benefits for BPJ Insurance.)

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