The Treasury Department should extend the effective date of its proposed regulations on split-dollar life insurance arrangements to Jan. 1, 2005, life insurance agents say.
Unless the effective date is extended, agents say, taxpayers will have little, if any, time to utilize certain transition and safe harbor rules in the proposed regulations.
These comments were submitted jointly to Treasury by the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors.
The issue involves two sets of proposed rules regarding split-dollar arrangements. The first set, issued in 2002, mandates that income and gift tax consequences of a split-dollar arrangement follow the formal ownership of the policy, AALU and NAIFA, both of Falls Church, Va., note.
Thus, they say, payments made by the “owner” of the policy for the benefit of a nonowner will be taxed using an economic benefit analysis, while payments made by a “nonowner” for the benefit of the owner will be treated as loans.
The second set, issued in 2003, states that the value of the economic benefits provided to the nonowner under the economic benefits analysis equals the cost of current life insurance protection, the policy cash value to which the nonowner has “current access” and the value of any other economic benefits, AALU and NAIFA note.
But given the realities of time pressures on an overextended Treasury staff, they say, it is doubtful that the regulations will be finalized before fall of 2003.
Since the regulations set Jan. 1, 2004, as the date of termination of the transition and safe harbor rules, taxpayers will have little time to utilize them, AALU and NAIFA say.
“This lack of adequate time is particularly disturbing because, whatever rules are promulgated in the final regulations, taxpayers should be provided with reasonable time in which to coordinate those rules with decisions respecting safe harbor implementation,” the groups say.
“Most taxpayers have, in fact, been deferring these decisions pending release of the final regulations,” AALU and NAIFA add.
The groups note that depending on the specific final rules, taxpayers will be faced with decisions on whether to employ the safe harbors with regard to existing arrangements, continue existing arrangements, terminate the arrangements entirely, make adjustments which can be determined only after the final regulations are issued, or enter into new split-dollar arrangements.
Taxpayers, the groups note, will seek the advice of attorneys and other advisors, who will have to explore dozens, if not hundreds of cases.
That is why, they say, the implementation date should be postponed one year to Jan. 1, 2005.