Endorsement Split Dollar for Executive Benefit Planning by pptfiles

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									Endorsement Split Dollar for Executive Benefit Planning

Peter C. Goudeau Jr., LUTCF
Financial Services Professional, New York Life Insurance Company 1330 Post Oak Boulevard Suite 1900, Houston TX 77506 713-963-4284 Registered Representative for NYLIFE Securities Inc.
Reference # 31897 AU

Member NASD/SIPC

NEW YORK LIFE Disclaimer
This seminar is for informational purposes only. Neither New York Life nor any of its Agents or Employees are in the business of giving tax, legal, or accounting advice. Attendees should consult with their own professional advisors to determine the appropriateness of any course of action.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Split Dollar Insurance
• Method for funding
– Not a type of life insurance

• Selective executive benefit arrangement
– Two parties share policy
• Cash value • Death benefit

– Written agreement spells out each parties rights
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Split Dollar Insurance
• Two Types of Split Dollar
– Collateral assignment (loan) – Endorsement method

• Let’s review the basics of each

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Split Dollar Insurance
• Two Types of Split Dollar
– Collateral assignment (loan)
• Policy generally owned by insured, a trust, or other 3rd party for the benefit of the insured’s heirs. • Premium paid by employer is generally considered a loan. • Interest payments must be paid to the employer. • Cash value and death benefit in excess of premium belongs to the insured/owner. • Note: Sarbanes Oxley Act of 2002 • This presentation focuses on the second type, the endorsement split dollar arrangement.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Split Dollar Insurance
• Two Types of Split Dollar
– Endorsement
• Policy is owned by the employer. • Premium is paid by employer. • The GREATER OF premiums paid or cash value belong to employer. – At death or surrender • Balance of death benefit belongs to executive/insured, his/her beneficiaries or trust. • Executive has income equal to the current value of the life insurance protection
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Advantages for the Employer

• Rewards executives on a discriminatory basis. • Provide valuable benefit to executives at a minimal net cost to the employer. • The employer will receive the greater of their premium payments or the policy cash value. • Helps tie key executives to the business.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Advantages for the Executive

• Provides life insurance protection at minimal cost to the executive. • The arrangement can be designed to meet the executive’s individual needs. • Death benefit proceeds are usually received income tax free by beneficiaries.

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
How it Works
Executive
Endorses death benefit to executive’s beneficiaries Pays income tax on the economic benefit to the IRS

Business

Owns the policy and pays the premium
IRS

Employer
Recovers cost Greater of CV or premiums paid

After death of the executive

Executive’s Beneficiaries
receive total death benefit minus the employer’s share 9

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

Endorsement Split Dollar
When Appropriate

• Generally used as a benefit to the executive.
– To fund needed personal insurance of the executive. – As golden handcuffs to help tie key executives to the business.

• Usually not used with shareholder/employee relationship.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
How is Arrangement Established

• Written documentation
– Agreement
• Rights of Employer and Executive • Generic specimen language • Agreement should be custom prepared to outline: – Parties, premium payments, CV and DB split, and termination events

– Corporate resolution
• Signed by officers of employer. • Identifies parties, business purpose, and authorizes plan.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Income Tax Consequences to Executive

• Executive receives a current economic benefit.
– Cost of life insurance protection. – Amount of cash value to which executive has current access. – Value of other benefits provided to executive.

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Income Tax Consequences to Executive

• Cost of life insurance protection
– Calculated using life insurance premium factor
• Published by Internal Revenue Service (IRS) • Currently Table 2001 • Last to die economic benefit calculated from Table 2001

– Frequently employer gives executive a bonus to cover the cost of the economic benefit
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Table 2001 Rates Per $1,000
Age 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
2001 rate

$ 0.70 0.41 0.27 0.19 0.13 0.13 0.14 0.15 0.16 0.16 0.16 0.19 0.24 0.28 0.33 0.38 0.52 0.57 0.59 0.61 0.62 0.62 0.64 0.66 0.68

Age 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49

2001 rate

$ 0.71 0.73 0.76 0.80 0.83 0.87 0.90 0.93 0.96 0.98 0.99 1.01 1.04 1.06 1.07 1.10 1.13 1.20 1.29 1.40 1.53 1.67 1.83 1.98 2.13

Age 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74

2001 rate

$ 2.30 2.52 2.81 3.20 3.65 4.15 4.68 5.20 5.66 6.06 6.51 7.11 7.96 9.08 10.41 11.90 13.51 15.20 16.92 18.70 20.62 22.72 25.07 27.57 30.18

Age 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

2001 rate

$ 33.05 36.33 40.17 44.33 49.23 54.56 60.51 66.74 73.07 80.35 88.76 99.16 110.40 121.85 133.40 144.30 155.80 168.75 186.44 206.70 228.35 250.01 265.09 270.11 281.05

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Case Study
Income Tax Consequences to Executive

• Economic benefit case study
– – – – Wanda Workerbee – Key executive age 41 Expressed need for more life insurance Employer $500,000 endorsement split dollar Wanda works till her age 65 then employer has choices
• Surrender the plan to recover costs • Keep policy until Wanda’s death to recover costs • Bonus policy to Wanda at retirement
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Case Study
Calculating the Economic Benefit
– – – –
Age 12 13 14 15 16 17 18 19

Age 41 rate = $1.13 per 1,000 Amount at risk = $500,000 Economic benefit (1.13 * 500) = $565 Income tax (25% marginal) = $141
2001 rate

Age
41

0.24 0.28 0.33 0.38 0.52 0.57 0.59 0.61

Age 37 38 39 40

2001 rate

2001 Rate
1.20 1.13 1.29 1.40

41
42 43 44

1.13

1.04 1.06 1.07 1.10

Age 62 63 64 65 66 67 68 69

2001 rate

7.96 9.08 10.41 11.90 13.51 15.20 16.92 18.70

Age 87 88 89 90 91 92 93 94

2001 rate

110.40 121.85 133.40 144.30 155.80 168.75 186.44 206.70

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Income Tax Consequences to Executive

• Executive’s right to any of the policy cash value.
– Income to the executive in the year that it becomes available. – Would occur if the split dollar agreement stated that the employer was entitled to the lesser of the cash value or the premiums paid.

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Income Tax Consequences to Executive

• Value of other benefits provided to executive.
– Riders to the life insurance policy
• Waiver of premium • Accidental death benefit • Other riders, as available

– ANY other benefit provided by the agreement! – Bonus paid to executive to offset cost in income taxable to the executive.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Case Study
Bonus From Employer • Bonus to pay tax
– Income from economic benefit $565
• This amount added to W-2 • Income tax payable = $141 • Executive out of pocket cost $141

– Employer could bonus $141 – Employer could “double bonus”
• Executive’s total W-2 income $753 from plan – $565 from imputed economic benefit – $188 cash bonus to cover all the taxes – Executive out of pocket cost $-0This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Income Tax Consequences to Employer

• Premium payments NOT deductible. • Bonuses paid to executive to offset his/her costs is deductible. • If employer transfers policy to executive the value of the cash value is deductible. • Surrender, sale, or bonus of policy will trigger income tax to the employer to the extent of gain in the life insurance policy.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Estate Tax Issues for Executive

• Estate Inclusion.
– To the extent the executive has any incidents of ownership, the policy is included in the executive’s estate. – To the extent the policy proceeds are paid to or for the benefit of the insured executive’s estate. – Transfers of the policy within three years of death of the executive.
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
Estate Tax Issues for Executive

• Life Insurance NOT included in estate
– If policy payable to an ILIT from inception of the policy. – If the right to receive the death benefit is endorsed to adult children or other third party from inception. – A policy or the rights to name the beneficiary is transferred out of the estate more than three years before death of the executive
This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Sounds Great What Do I Do
• Interested?
– Here is what we need to do
• Schedule an appointment. • Review facts surrounding your situation.

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar
What We Need To Know

This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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This seminar is for informational purposes only. Please consult your professional advisors for tax, legal or accounting advice.

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Endorsement Split Dollar for Executive Benefit Planning

Thank You For Your Attention
Reference # 31897 AU


								
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