What are the requirements and regulations for Split Dollar Insurance?

Final Split Dollar Regulations

The final regulations apply to arrangements entered into after September 17, 2003.  A split dollar arrangement entered into prior to this date is not governed by the final regulations unless it is materially modified after September 17, 2003.  If you have a split dollar program issued prior to this date we can provide full administration and review and consult with your tax advisors regarding the options now available to you.

According to the final regulations, existing split dollar arrangements, established prior to September 18, 2003, will continue to be governed under the original economic benefit rules outlined in Revenue Ruling 64-328 and Revenue Ruling 66-110.  However, if an existing equity collateral assignment arrangement is terminated during lifetime or converted to a loan arrangement in the future, any policy equity will be subject to income taxation at that time.  Depending on how the arrangement is structured, it is very likely that the IRS will also subject such equity to gift and generation-skipping transfer taxation.

New Split Dollar Arrangements Subject to Final Regulations

The final regulations categorize split dollar plans into two mutually exclusive regimes: the economic benefit regime and the loan regime.  How you structure your particular split dollar plan will be based on certain factors.

Economic Benefit Regime. Under the economic benefit regime, you or your company will advance the annual premium each year, and if an Irrevocable Life Insurance Trust (ILIT) is the policy owner, you will also make a gift of the economic benefit amount each year to the trust.  The economic benefit amount can be significantly lower at younger ages because it is based on the annual “term” cost of the death benefit and not the policy’s full premium.

In a corporate context in which you or your ILIT is the owner of the policy and your company lends you or your trust the premium, you must annually report the economic benefit cost as income. In a family or corporate context in which a trust is owner of the policy, the economic benefit amount also constitutes a gift for federal gift tax and generation-skipping transfer tax purposes.