The latest Treasury Department notice on split-dollar life insurance is seen by some in the industry as part of a pattern of attacks on the product driven by politics and publicity, rather than substance.
The new notice seeks to stop the spread of what the Treasury calls “an abusive tax avoidance transaction using split-dollar life insurance.”
Treasury says Notice 2002-59 deals with split-dollar life insurance arrangements, including reverse split-dollar, where the parties attempt to avoid taxes by using inappropriately high current term insurance rates, prepayment of premiums or other techniques to understate the value of taxable policy benefits.
“The notice makes clear that using any scheme to understate the value of benefits for income or gift tax purposes wont be respected,” says Pamela F. Olson, acting assistant secretary for tax policy.
This notice comes on the heels of legislation recently enacted by Congress, H.R. 3763, that bars personal loans from corporations to their executives. This legislation contains an ambiguity that leaves unresolved whether split-dollar is included under the prohibition.
Industry representatives say when they sought a clarification that split-dollar is not included, members of Congress expressed sympathy for the industrys position, but declined the request because of the controversy around the executive compensation issue.
One representative, who asked not to be identified, says that is the consistent response the industry receives both on Capitol Hill and among regulatory agencies when it raises concerns over the assault on split-dollar.
“Everyone says we may be technically right, but there is nothing they can do in this environment,” he says.
The latest Treasury notice on split-dollar came following a New York Times article outlining alleged abuses allowing wealthy individuals to avoid gift taxes.
According to Notice 2002-59, the use of techniques such as inappropriately high current term insurance rates and prepayment of premiums to understate the value of policy benefits does not conform to, and is not permitted by, any published guidance.
In addition, the notice addresses the use of two available methods of determining the value of current life insurance protection under a split-dollar arrangement.
Specifically, the notice says in 2001 Treasury published a new table of one-year term premiums to determine the value of current life insurance protection on a single life under a split-dollar policy.
Alternatively, the notice says, taxpayers can determine the value of current life insurance protection by using the insurers lower published premium rates that are available to all standard risks.
However, the notice says, these methods can be used only for the purpose of valuing current life insurance protection for federal tax purposes when, and to the extent, the protection is conferred as an economic benefit by one party on the other party.
But, the notice says, if one party has any right to current life insurance protection, neither method can be relied upon to value that partys current life insurance protection for the purpose of establishing the value of any policy benefits to which another party may be entitled.
The notice provides the following illustration:
Consider, it says, a situation in which a donor pays the premiums on a life insurance policy that is part of a split-dollar arrangement between the donor and a trust and the trust has the right to current life insurance protection.
Under this situation, the notice says, the current life insurance protection has been conferred as an economic benefit by the donor on the trust, and the donor is permitted to use either of the two methods to value the current life insurance protection for federal tax purposes.
By contrast, the notice says, consider a situation in which the donor pays the premiums on a life policy that is part of a split-dollar arrangement between the donor and the trust, and the donor has the right to the current life insurance protection.
Under that situation, the notice says, neither method may be relied upon to value the donors current life insurance protection for the purpose of establishing the value of the policy benefits conferred upon the trust for federal tax purposes.
The results would be similar if the trust pays for all or a portion of its share of the policy benefits under the arrangement.
Industry associations say they are studying the notice. But one practitioner, who asked not to be identified, says the notice is troubling.
For one thing, he says, some of the language is difficult to understand.
Another problem, he says, is it is effectively retroactive, and could cause serious tax consequences for those with existing arrangements.
In other news, agents and companies are preparing for another potential battle on corporate-owned life insurance.
The American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Association for Advanced Life Underwriting, and the Independent Insurance Agents and Brokers of America sent a joint letter to Senate leaders registering their “strong opposition” to a COLI bill that may be considered next month.
The letter notes Sen. Jeff Bingaman, D-N.M., may introduce a proposal that would tax the death benefits associated with any insured individual who did not die within one year of leaving the company.
This legislation, the letter says, will undermine a responsible business product that helps pay for the cost of health care, retirement and other employee benefits.
Reproduced from National Underwriter Life & Health/Financial Services Edition, August 26, 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.