Split-dollar insurance.Split-dollar life insurance arrangements may be the best way to plan for early retirement; however a recent private letter ruling may change the way these arrangements are taxed. CPAs should be cautious when recommending them to clients. In a split-dollar arrangement, the employer and the employee share the cost of the annual premiums. The employee typically contributes the cost of a simple term life insurance policy with an equal benefit and the company pays the rest. There is no limit on the annual contribution, and although the benefit to the employee is minimal in the early years, the Years, The the seven decades of Eleanor Pargiter’s life. [Br. Lit.: Benét, 1109] See : Time plan becomes very attractive as the years pass because the cash surrender values The amount of money that an insurance company pays the insured upon cancellation of a life insurance policy before death and which is a specific figure assigned to the policy at that particular time, reduced by a charge for administrative expenses. are substantial. In 1964, the Internal Revenue Service published revenue ruling 64-328, which said employees would be taxed only on the annual value of the benefit of the arrangement or the amount equal to the one-year cost of the declining life insurance protection to which the employee was entitled annually, less the portion provided by the employee. In technical advice memorandum 9604001, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. ruled that a corporate officer should be taxed on the value of cost-free insurance purchased on his behalf. The officer's life was insured under two policies purchased through a split-dollar arrangement. The employer paid for the coverage in advance with a single-premium payment large enough so that the future earnings would cover the annual premiums attributable to the death protection portion of the policies. The employee paid nothing. The IRS previously had ruled that normal split-dollar valuation rules applied if fully paid coverage was achieved in three years. The IRS acknowledged that the split-dollar arrangement in the TAM differed from the one in revenue ruling 64328, but the service called this difference insignificant because after three years the employee in the TAM and the employee in the revenue ruling would be in the same position. The IRS said the employee in the TAM should be taxed each year on an amount equal to the one-year term cost of declining life insurance and any cash surrender buildup in the policies that exceeded the amount returned to the employer when the arrangement was discontinued. This is the first time the IRS has ruled on the buildup of cash values in split-dollar arrangements. Observation: The traditional split-dollar arrangement as we know it may not last forever. There is a good chance the IRS will reevaluate these arrangements and treat them as interest-free loans under internal revenue code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. section 7872. In recent private letter rulings, the service said that no opinion would be expressed or implied concerning the application of section 7872 for split-dollar arrangements, but if the IRS begins to impute impute v. 1) to attach to a person responsibility (and therefore financial liability) for acts or injuries to another, because of a particular relationship, such as mother to child, guardian to ward, employer to employee, or business associates. interest it will be their death knell death knell Noun something that heralds death or destruction Noun 1. death knell - an omen of death or destruction . CPAs should advise their clients that split-dollar arrangements already issued would be grandgathered under any new rules. Michael Lynch Michael Lynch or Mike Lynch may mean or refer to:
|
|
||||||||||||||||||
Printer friendly
Cite/link
Email
Feedback
Reader Opinion