Split Dollar
Executive Benefit Planning
•THE NEED…
– to provide your Key Executives with special benefits as a reward and incentive
–to provide Yourself enhanced benefits
•THE TYPE…
– of benefit provided and other business factors will influence where the benefit falls on the business time line
•THE COST…
–will depend on funding decisions you make now and economic realities at the time of a trigger event
Executive Benefit Arrangements
•Benefit arrangements between a business and key executives
•Many different arrangements are available
•Numerous factors will drive the selection
A SPLIT DOLLAR ARRANGEMENT MAY HELP YOU TO ACHIEVE THESE GOALS
Two of the most common types of split dollar plans
Split Dollar Economic Benefit Program
In the economic benefit arrangement, the Permanent Life Insurance Policy will act as the funding mechanism to provide an income tax free death benefit for the executive. The business is the owner and beneficiary of the policy. The policy is a business asset and the cash values will be an asset on the business’ balance sheet. The business will endorse part of the death benefit to the executive. (The business must retain a death benefit amount at least equal to the total premiums it has paid on the policy). When the arrangement ends due to the death of the executive – the business will recover its premium payments through the death benefit. If the executive retires or terminates employment, the business will recover its costs via the cash value or by holding on to the policy until the executive’s passing.
The executive will name the beneficiary for the endorsed death benefit. The executive will include in income the pure term cost of the death benefit. The actual out of pocket cost is the tax due on that amount. Under this arrangement, the executive has valuable death benefit protection at a relatively small out of pocket amount. The Business maintains control of the life insurance funding vehicle and the insurance may become a vital business asset, providing tax advantaged cash value growth and income tax free death benefit protection.
Split Dollar Loan Program
The other alternative is the split dollar loan program. This is a very different design and is intended to provide the executive with all of the benefits of the permanent life insurance including tax advantaged cash value growth as well as income tax free death benefit protection. In this arrangement the executive will own the policy and the business will pay the premium in the form of a split dollar loan. That loan is collateralized by the policy itself.
The out of pocket cost to the executive is the interest due on the loan. In some designs, the business will bonus funds to the executive in an amount calculated to help the executive pay the interest. In this way, the executive’s out of pocket is very small.
The business will receive the interest on an annual basis. At the end of the arrangement (the executive’s death, retirement or termination of employment, or at some period otherwise defined in the agreement) the business will receive a return of the principal – usually through the cash values of the policy. If the cash value is used, the surrender or loan will reduce the total cash value and death benefit in the policy.
The business has had little impact on its balance sheet – essentially moving cash to collateral and back to cash again. During the loan term the business receives interest income which will be taxable.
The executive has acquired a portable benefit platform (death benefit protection and tax advantaged cash value accumulation) at a relatively low out of pocket amount.
Actual results will depend upon the contributions made and the performance of the policy. All new policies are subject to underwriting.
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