Tax considerations
- Under non-equity split-dollar, the insured employee is taxed on the economic benefit received from the plan annually.
- Under split-dollar as a loan, the insured employer is taxed on imputed interest income annually. The employer may not deduct split-dollar plan contributions.
- Any cash bonus the employer pays to the employee is tax deductible as compensation.
- Death proceeds are received income tax free.
- If the insured employee has incidents of ownership in the policy (including the right to name a beneficiary), that portion of the proceeds will be includable in the insured's estate.
- If properly arranged, corporate incidents of ownership in the policy will not be attributed to an insured majority shareholder. However, there are some unsettled tax questions as of this writing.
Conventional split-dollars plans have a variety of business uses...
- An employee benefit enabling key employees to buy cost-effective personal life insurance.
- Funding key employee buy-sell agreements.
- Funding cross-purchase buy-sell agreements in closely held corporations.
- Providing corporations a way to buy life insurance under salary continuation-type supplemental executive retirement plans.
- Substituting for group life insurance.
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