Agents May Find Opportunity In Split-Dollar Rescues
By Randall S. Macon
In the coming months, many employers sponsoring split-dollar plans will be re-evaluating those arrangements in light of recent IRS pronouncements and the looming Dec. 31, 2003, deadline.
Important business decisions will have to be made about each plans future. Should the existing split-dollar agreement be terminated, recast into one of the new “regimes” or continued “as is?” A proper decision about the fate of each plan will, in large part, depend upon the availability of accurate information on its current status.
What Your Peers Are Reading
Unfortunately, up-to-date split-dollar plan accounting is rare and, as a result, many plan sponsors may find they have insufficient information to determine which option best suits their situation.
Historically, it has fallen upon life insurance professionals to track and properly administer the split-dollar plans they sold and installed. Indeed, many have done an outstanding job of ensuring that their plans were carefully documented at the outset and that participants reported appropriate “economic benefit” amounts along the way.
Professionals in this category can easily advise their split-dollar clients on the plans current status as well as recommend a tax-smart strategy for the future. They likely work closely with their clients CPA and may even utilize some third-party administration for their larger business insurance cases. Clearly, employers sponsoring split-dollar plans under the guidance of this kind of professional will be the lucky ones in their upcoming decision process.
There is, however, a potentially larger category of split-dollar arrangements. These are the unadministered or ill-administered plans that were sold with great fanfare and then left to flounder. Plans in this category will include those in which no split-dollar document was ever drafted, drafted carelessly or simply misplaced through the years. It will also include those plans in which participants have not been reporting as income the required “economic benefit” and no one seems to know exactly what portion of the whole belongs to the employer and what portion belongs to the employee.
Furthermore, the insurance carrier that issued the policies may know even less. While the carrier may have originally recorded collateral assignments and noted in its policy files that the plans were “split dollar,” it seldom has information on plan details. Consequently, the employers CPA and/or new insurance professional must perform significant detective work to determine the plans current status before they can even begin to develop a strategy for the future.
The marketing opportunity for the insurance professionals referenced earlier may come in the cleanup process itself. Agents who engaged in “hit and run” planning will likely be AWOL. This means that knowledgeable and professional producers experienced with split-dollar-based plans will be invaluable in evaluating existing arrangements and, if appropriate, developing an attractive “rescue” strategy.
The process seemingly should begin with some basic questions about the plans original purpose and design. For example, is the plans so-called “equity split dollar” of the type under attack by IRS? If so, is its primary purpose to provide the insured employee with a death benefit either in or outside the estate?