Marketplace: Final Split-Dollar Regulations Bring Clarity to Tax Status

• Ronald J Panko
• December 2003
• 

The Treasury Department and Internal Revenue Service have issued final regulations on the tax treatment of split-dollar life insurance, bringing clarity to a murky condition that had existed since 1996. The regulations apply to arrangements made or materially modified after Sept. 17.

Pam Olson, Treasury's assistant secretary for tax, said the regulations curb a "backdoor form of executive compensation" and promote "greater transparency." If an executive owns a policy, the employer's premium payments are treated as loans to the executive; unless the executive pays the employer market-rate interest on the loan, he or she will be taxed on the difference between market-rate interest and actual interest. If the employer is the owner, the employer's premium payments are treated as providing taxable economic benefits to the executive, which can include an interest in the cash value and/or death benefit.

The rules also apply to split-dollar between family members or other parties.

In January 2002, Treasury and the IRS had issued proposed regulations and advised affected parties "that using any scheme to understate the value of benefits for income or gift tax purposes won't be respected." The final regs are "not materially changed" from those proposed regulations, according to onlineAUS.com, which provides sales, tax and technical information to advanced financial professionals. But AUS noted that transitional rules on arrangements in effect before Jan. 28, 2002, will expire on Dec. 31, 2003.

During a teleconference hosted on Sept. 24 by Manulife USA, panelists Larry Brody, Stephan Leimberg and Randy Zipse called on financial advisers to review existing plans, especially those in which significant equity has accumulated, and cautioned them about making changes that could alter an arrangement's tax status. The panelists specialize in estate, business and tax planning.

Prudential Financial Inc. also responded to the new regulations, announcing on Sept. 25 a "comprehensive educational program" to assist its sales professionals in offering advice to clients.

By Ron Panko, senior associate editor, Best's Review: Ronald.Panko@ambest.com