The Internal Revenue Service says taxpayers can make some changes to split-dollar life insurance arrangements without triggering “material change” rules.
If the parties to an arrangement change the arrangement without changing the underlying life insurance policy, the modification will not be treated as a material change for purposes of applying Section 101(j) and Section 264(f) of the Internal Revenue Code.
Section 101(j), added by the Pension Protection Act of 2006, limits the amount of tax-deductible life insurance benefits employers can get from corporate-owned life insurance, unless the insureds are directors, highly compensated employees, or current or recently departed employees. That rule grandfathers in life policies issued on or before Aug. 17, 2006.
Section 264(f), added by the Taxpayer Relief Act of 1997, provides that, in many cases, a taxpayer cannot deduct interest expense related to the unborrowed cash value of a life insurance policy, annuity or endowment contract. That section grandfathers in policies issued on or before June 8, 1997.
The notice will help some taxpayers avoid having to apply the 1997 interest rules or the 2006 split-dollar rules.