How Business Funds can be Used to Pay for Your Second-to-Die “Survivorship Life” Insurance Policy

Like single life policies, one can use Survivorship life insurance in split dollar plans, permitting business funds to finance the purchase of insurance coverage. This is particularly attractive if the retained corporate dollars used to finance the premium payments are taxed at a corporate rate that is lower than that of the stockholder-employee. Because the premium payments are nondeductible, it will be tax cost effective to use lower-taxed corporate dollars to finance this insurance.

The stockholder-employees share of the split dollar SL proceeds can provide estate liquidity to solve the problems discussed earlier for the family-owned business. The corporation can retain a share of the proceeds through a collateral assignment split dollar arrangement and be repaid fully for its entire contribution. Alternatively, the corporation share can be rolled-out or bonused to the stockholder-employee at a later date.

The design of the split dollar SL plan can serve favorable income and estate tax purposes. The insured stockholders can avoid all estate tax consequences if a SL trust enters into the split dollar agreement with the employer. The insureds should obtain no incidents of ownership in the policy if the SL trust is both the policyowner and applicant. In addition, the corporation should avoid obtaining incidents of ownership (e.g., access to the cash surrender value) if an insured is a majority shareholder. Any incidents of ownership held by the corporation will be attributed to the majority shareholder if the proceeds are not payable to or for the benefit of the corporation.

The design of the plan controls the income tax consequences of the split dollar SL plan. If the employer pays the entire premium, the stockholder-employee is taxed annually on the economic benefit of the coverage.

The SL split dollar plan works the same way as the single life split dollar plan except that very low rates are likely to be used to measure the pure term insurance cost while both insureds under the SL policy are alive. Depending on the age of the insureds, the premium rates may be significantly lower than the single life rates. What this means is that the taxable benefit in the employer-pay-all SL split dollar plan is only a fraction of what it would be if the plan used a single life policy.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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