SilverLink - Spring/Summer 2008 - (Page 28)

actual premium was $12,274, the average amount of taxable income for the executive was less than $600. In addition to the favorable tax treatment of the premium, cash value could be transferred to the executive. In the example, when the executive retired, he received a paid-up $1,000,000 policy with $325,500 of cash value. Presuming the employee held the policy until death, he would never pay tax on the cash value and the death proceeds would be received income-taxfree by his beneﬁciary. Several years ago, this favorable tax treatment of split-dollar life insurance was severely curtailed. In 2001, the IRS issued Notice 2001-10, followed in 2002 by Notice 2002-08. The coup de grace came on September 17, 2003, with the issuance of Final Regulations, which eliminated much of the favorable tax treatment advisors had relied on for more than thirty years. What had once been a well-accepted employee beneﬁt used by both Fortune 500 companies and thousands of small, closely-held businesses, suddenly became a “tax loophole.” Instead of the very favorable measure of economic beneﬁt, a new, higher measure (called Table 2001) was mandated. The employer’s premiums are now considered loans on which the employee must pay interest. Cash values are now taxed to the employee. The net result of the Final Regulations was a dramatic reduction in the ways in which split-dollar plans can be used to provide executives with reasonably priced life insurance. Typically, when IRS rules change, they are effective prospectively, and taxpayers who rely on “old” rules are grandfathered. Unfortunately, the IRS did not provide clear grandfathering for individuals who participated in split-dollar plans prior to the rule change. Consequently, taxpayers remain in a state of uncertainty. If they make any material change to the existing arrangement, it will now be taxed under the new rules. If the taxpayer simply does nothing, he or she runs the risk that the IRS will interpret the old plans unfavorably, resulting in signiﬁcant current and future taxation. Many tax practitioners believe that doing nothing is simply not a viable option—the consequences are too severe. Any business or individual that participated in a pre-2003 splitdollar plan should review the plan in 2008. The alternatives can be different for each situation depending on multiple factors, such as the ongoing need for insurance, the insured’s health, policy performance or terms of the agreement, to name a few. The key is to bring this to the attention of your tax and insurance advisors before December 31, 2008. Why December 31, 2008? To complicate matters, the IRS has further indicated that certain split-dollar arrangements will be subject to the new IRC Section 409A legislation, which becomes effective on December 31, 2008. 2 The affected split-dollar plans must be reviewed and amended to comply with IRC 409A by that date. Adding to the complexity of split-dollar arrangements, the accounting rules providing post-retirement beneﬁts have also been changed. The new rules, which apply to ﬁscal years beginning after December 15, 2007, require the employer to accrue for the expected post-retirement liability. This could have a material impact on the ﬁnancial statement of certain companies. What had once been a well-accepted employee bene t used by both Fortune 500 companies and thousands of small, closely-held businesses, suddenly became a “tax loophole.” There is much bad news regarding split-dollar plans. Is it fair to say that this type of executive beneﬁt is obsolete? It’s hard to know for certain, but the effectiveness of these plans has deﬁnitely been severely crippled. There are still a few circumstances in which a carefully crafted split-dollar arrangement can afford signiﬁcant tax leverage. These situations, however, are unique and should be implemented only by experienced planners for sophisticated clients. Unless regulations change substantially, traditionallyimplemented split-dollar plans used by employers for their executives will probably become a dim memory for executives and beneﬁt managers. SilverStone Group has a long history of working with splitdollar arrangements. You may contact the experts at SilverStone Group with your questions. 1 2 Deﬁnition from Answers.com, Business & Finance website, accessed March 27, 2008 at www.answers.com/topic/split-dollar-life-insurance. For more information on 409A, reference “Countdown to Compliance—Extension of Section 409A,” by Nancy Milledge, CLU, ChFC, SilverLink Winter 2008, pp. 27-28. CONTACT MARK WEBER AT 402.96 4.54 42 OR MWEBER @ SSGI.COM 28 http://www.answers.com/topic/split-dollar-life-insurance http://Answers.com

Table of Contents Feed for the Digital Edition of SilverLink - Spring/Summer 2008

SilverLink - Spring/Summer 2008 Contents Risk Management: Mitigate & Educate Disastrous Distractions Accounts Receivable BoomerCare Risk Reduction, What’s Your Function? Time Out! Double Down Employee Benefits: Who’s Paying Whom for What? Time to Reconcile Keep Your Eye on the Pension Prize Show Me the Money Private Client Services: A Generous Strategy Is There Any Good News Left? Special Insurance for Special Times Client Spotlight: Omaha Performing Arts Internal Happenings: SilverStone Group Wellness Activities Group

SilverLink - Spring/Summer 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.