Heres a quick question for you: why should financial advisors keep an eye on Jan. 1, 2004?
The best answer isnt because thats the day the 115th Rose Bowl game is scheduled to be played. Its because Jan. 1, 2004, is when IRS rules for split-dollar insurance plans are expected to change. Of course, predicting exactly how they will change is almost as hard as forecasting the final score of that big game in Pasadena more than a year from now.
IRS Notice 2002-8 issued in January appears to soften a stricter and controversial version of earlier IRS rules, which were announced in the waning months of the Clinton administration. Under the earlier rules, split-dollar plans would have been sharply curtailed.
The latest pronouncement by the IRS concerning the appropriate treatment of split-dollar plans appears to offer a measured amount of “grandfathering” for agreements entered into prior to Jan. 28, 2002, and terminated before Jan. 1, 2004. For those of you whose clients have pre-Jan. 28, 2002, agreements, they should be able to continue to use the insurance carriers alternate term rate as the appropriate measure of economic benefit. And if they terminate the agreement prior to Jan. 1, 2004, there should be no taxation on the cash value that passes to the employee.
But, we are well beyond Jan. 28, 2002, and the question becomes does split-dollar still make sense? The answer, I believe, is yes, if you and your clients can be flexible and live with a degree of uncertainty. Specifically, Notice 2002-8 provides that “no inference should be drawn from [the] notice regarding the appropriate Federal income, employment and gift tax treatment of split dollar life insurance arrangements entered into before the date of publication of final regulations.”
Traditionally, split-dollar plans have been a good way for businesses to provide low-cost life insurance and other retirement benefits for their key executives. Split-dollar plans enable an individual to obtain life insurance at a lower cost because his or her company pays a portion of the premium. In most split-dollar plans the employee owns the policy and the company, through an assignment of policy values and benefits, retains an interest in the policy.
Split-dollar plans also are well suited for older executives or those who are rated and would have a hard time finding affordable insurance without help from a business. In addition, split-dollar plans, particularly the endorsement method, can be used in conjunction with deferred compensation and salary continuation plans.
And, while split-dollar continues to be an attractive solution for many clients, agents will need to keep an eye on exactly what the IRS announces between now and Jan. 1, 2004.
Its widely expected that, if the employer is the designated owner of the insurance policy, any policies transferred to the employee would be taxable under Section 61 of the Internal Revenue Code. On the other hand, if the employee is the designated owner, any premium paid by the employer would be treated as a loan or as compensation, depending on whether the employee is expected to repay the money. If the payments are to be repaid, then the proposal regulations are expected to provide that the loan would be subject to below-market loan or original-issue discount rules under Code Sections 1271-1275 and 7872, respectively.
Where split-dollar plans are involved, a key consideration going forward will be the economics of the transaction. That is, if the premium is treated as a loan, at what point and time does the loan interest make the arrangement unworkable? As a result, it will be critical for advisors to perform a case-by-case economic analysis with their clients to determine if the split-dollar approach is in the clients best interest.
Until the new regulations are published, however, split-dollar plans may be considered a viable alternative for appropriate clients–especially business owners who are seeking windows of opportunity and are willing to be flexible about their plans down the road. There also may be benefits to be secured in agreements that are entered into now, before the date the IRS issues final regulations, which will not be available later.
Even advisors who in the past have not elected to recommend split-dollar for their clients should become familiar with the plans features. Since todays clients have access to more information than ever, its wise for advisors to be prepared and have an understanding of split-dollar plans in the event that clients ask whether it might be a good alternative for them.
Smart advisors know that its essential to seize every opportunity to contact and, preferably, meet with clients to keep them abreast of issues affecting their finances. Split-dollar presents an opportunity not only to serve certain clients, but also to demonstrate real value to all clients by keeping them current on other ways to help them preserve their wealth.
A good source of information about split-dollar plans and the anticipated change in IRS regulations is the American Council of Life Insurers at www.acli.com. For more specific help, advisors should contact their carrier and ask to talk to a split-dollar specialist.
The bottom line: split-dollar plans can still generate added revenue for the agents business, and, as the industry becomes more competitive, we all know how important it is to take advantage of every opportunity. But, in financial services and football, every player needs to know the rules and keep an eye on the clock or, in this case, the calendar.
, JD, CLU, ChFC, is vice president, advanced sales, for Zurich Life, Schaumburg, Ill. He can be reached at stephen.link
Reproduced from National Underwriter Life & Health/Financial Services Edition, June 24, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.