The Triple Win Of Endorsement Split Dollar As An Executive Benefit Planning Tool
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Endorsement split dollar has long been used as a planning tool to provide executives with an affordable option to obtain additional insurance coverage.
Typically, a companys group life plan that provides all employees with a small death benefitusually no more than $50,000has little impact upon highly compensated executives. Such small sums will do virtually nothing to replace the substantial income unexpectedly lost to the family of a deceased executive or to provide estate liquidity for that executive after retirement.
Likewise, the employer sees advantages in utilizing endorsement split dollar for recruiting and retaining key employees by offering this benefit and growing it over time.
Endorsement split dollar works like this: The employer purchases and owns an insurance policy on the life of an executive. Then, the employer endorses part or all of the death benefit to the personal beneficiary of the executive. This executive, in turn, "splits" the premium with the employer by paying his economic benefit for the death benefit endorsed to the executive using a measurement of the annual renewable term cost of the life insurance. (See chart.)
This portion of the premium is usually quite small and is based, somewhat loosely, on what the cost of term insurance would be for that executive to obtain the same amount of coverage.
In most circumstances, the employer pays the entire premium with the executives portion being imputed to him as income. The executive is then responsible for the income tax on the employers payment of his portion of the premium.
While employed, the executive has substantially greater life insurance protection than provided by a group life plan. At retirement, the employer has a number options of what to do with the policy. The employer could elect to continue owning the policy and, if the executive wishes to have his beneficiary receive the death benefit, the executive would still contribute his portion of the premium in terms of the economic benefit calculation.
Normally, however, the employer and executive desire to sever their relationship at retirement with the employer "bonusing" the policy to the executive. The employer transfers ownership of the policy to the executive pursuant to an exception of the transfer for value rule. The policys cash value is treated as compensation to the executive who is responsible for the income tax.
If transferring ownership of the policy to the executive at retirement is the intent at the beginning of the endorsement split dollar plan, the executives future tax liability can be addressed more creatively. The employer throughout the executives employment can build the cash value so that, at retirement, when the policy is transferred, there may be enough cash in the policy for the executive to withdraw to meet his tax liability and to continue the policy in-force without further premium contributions.
Used in this way, the endorsement split dollar plan is a powerful retention tool for the employer. The increasing value of this "retirement benefit" decreases the likelihood of the executive prematurely leaving employment.
Once in the hands of the insured, the executive can maintain personal ownership of the policy or transfer it to the executor of his irrevocable life insurance trust for placement into the trust. The cash value in the policy would then apply against the executives lifetime exemption.
