Split-dollar life insurance.The arrangement under which an employer and an employee share the costs and benefits of a cash value life insurance policy on the employee's life is known as split-dollar life insurance. Given that SDLI arrangements are not subject to the antidiscrimination rules applicable to qualified retirement and other types of benefit plans, such arrangements give employers added flexibility in rewarding key personnel and shareholder -- owners; in addition, these arrangements also are advantageous to employees, because they cost less than personally owned life insurance. As a method that divides the economic benefits and burdens of life insurance between a company and an employee, SDLI allows the company to subsidize sub·si·dize tr.v. sub·si·dized, sub·si·diz·ing, sub·si·diz·es 1. To assist or support with a subsidy. 2. To secure the assistance of by granting a subsidy. (in whole or in part) the employee's coverage. When the employee dies or the policy is terminated, the employer receives some (or all) of the policy's cash surrender value 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. (depending on how the premium payments were arranged) and the employee's estate receives the balance. Premiums. In most cases, the employer pays all the premiums and the insured is treated as receiving taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. . Under the two most typical arrangements, the employer's premium is equal to the annual increase in the policy's cash surrender value (the employee pays the balance) or the employee contributes the cost to buy a one-year term policy of equivalent coverage (the employer pays the balance of the premium). Benefits. When an insured employee dies, the split of benefits usually is determined by the interests in the arrangement. The employer's portion can be a return of premiums paid, the policy's cash surrender value at the date of death or the greater of the two. The employee's estate then receives the balance of the payout pay·out n. 1. The act or an instance of paying out. 2. A percentage of corporate earnings that is paid as dividends to shareholders. . OWNERSHIP OF THE POLICY SDLI can be structured in several ways, each of which may affect who is considered the SDLI policy's owner. Under the collateral assignment method, the insured or a third party owns the policy; the owner collaterally assigns rights in the policy to the employer. These rights may vary considerably, from virtually all rights to a "bare bones No frills. No luxuries. See bare bones system. " collateral assignment. Under the endorsement method, the employer owns the policy, and the employee's rights are contained in an endorsement filed with the insurer. In a traditional endorsement policy, the employee's sole right is to name the beneficiary beneficiary Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. of the proceeds in excess of the employer's interest in such proceeds. Under the undocumented method, a contractual arrangement with the employee protects the employer's advances. Under the coownership method, the employee (or other owner) directly owns a share of the policy's cash surrender value. ESTATE TAX ISSUES Ownership. To be excludable from an estate, the proceeds cannot be receivable by or for the benefit of the insured's estate, and the decedent An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. may not have any incidents of ownership in the contract. If the insured individual does not retain any incidents of ownership in a policy, the proceeds should not be includable in his or her estate. However, ownership of a policy by a corporation that is more than 50% owned by the insured or owned jointly by the individual and another may present difficulties. Similar problems may arise with stock owned by spouses or other family members, as ownership may be attributed to the insured. Three-year rule. If an insured dies within three years of transferring ownership in a policy on his or her life, the proceeds are includable in his or her estate. This rule also may have to be considered when a controlled corporation owns a policy on the individual's life and the insured disposes of sufficient shares to reduce his or her voting interest Voting interest in business and accounting is a percentage of voting stock owned. This notion is different from economic interest that refers to a percentage of all the equity issued, including preferred stock, warrants, and so on. in the corporation to less than 50%. IMPUTED INTEREST Imputed Interest A term used to describe interest considered to be paid, even through no interest payment has been made. Notes: Imputed interest is calculated based upon actual payments that are to be paid, but have not yet been paid. There may be imputed interest issues. If an SDLI arrangement is characterized char·ac·ter·ize tr.v. character·ized, character·iz·ing, character·iz·es 1. To describe the qualities or peculiarities of: characterized the warden as ruthless. 2. as a series of interest-free or below-market-interest-rate loans, an employee would have to report the forgiven interest as income. On the other hand, such advances and other loans from an employer to an employee would have to exceed $10,000 before resulting in interest income. For a discussion of SDLI, see "Is Split-Dollar Life Insurance Still a Fringe Benefit fringe benefit Any nonwage payment or benefit granted to employees by employers. Examples include pension plans, profit-sharing programs, vacation pay, and company-paid life, health, and unemployment insurance. ?" by Robert Swanson, in the January 1998 issue of The Tax Adviser. |
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