UFS. Continuing Education for CPAs. Making Sense of Split Dollar. Presented By: {Name} (Company Approved Title} L [exp0214][All States][DC]

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1 UFS Making Sense of Split Dollar Presented By: {Name} (Company Approved Title} L [exp0214][All States][DC]

2 Metropolitan Life Insurance Company, New York, NY New England Financial is the service mark for New England Life Insurance Company and related companies, 501 Boylston Street, Boston, MA MetLife companies. MetLife Insurance Company is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State Boards of accountancy have final authority on the acceptance of individual courses for CPE credit.

3 What is Split Dollar? Two parties share the costs and/or benefits of a life insurance policy Usually involves a business and key employee Best used when one party (usually the business) has a greater premiumpaying ability NOT a type of life insurance

4 The Ideal Prospect Key employees or business owners who need life insurance for Survivor benefits Estate liquidity Retirement income Key employee coverage Business continuation

5 Identify the Need KEY EXECUTIVES Do you want to provide living benefits to reward your key executives? Ask Your Client Do you want to provide a substantial death benefit for your key executives? BUSINESS OWNERS 1) Do you want to use company dollars to pay for your personal life insurance? What is your corporate tax bracket? What is your personal tax bracket? 2) Are you interested in building up your retirement fund using corporate dollars?

6 Entities for Split Dollar Key employees and owner/employees of C corporations Non-owner key employees of pass-through entities S corporations LLCs Partnerships Sole proprietorships

7 Benefits of Split Dollar Substantial amounts of life insurance can be obtained at a minimal out-of-pocket cost, to the employee Costs and benefits can be shared in an agreed upon manner

8 Structuring Split Dollar Will the plan be for key employees? OR Will it be for an owner/employee?

9 Structuring Split Dollar: KEY EMPLOYEES ENDORSEMENT TYPE Employer pays premiums Employer owns policy (including cash values) Some portion of death benefit is endorsed to the employee s beneficiary, balance paid to employer Key employee reports the value of the life insurance protection (i.e. economic benefit) as taxable income

10 Structuring Split Dollar: KEY EMPLOYEES BENEFITS of this type of arrangement: For the employer retains control of policy, including cash value can use cash values to informally fund deferred comp plan should the employee leave, the policy can generally be exchanged for a policy on another employee For the employee obtains a substantial tax-free death benefit

11 Structuring Split Dollar: FOR OWNER/EMPLOYEES LOAN or ECONOMIC BENEFIT REGIME Step 1: Compare the economic benefit cost with the imputed interest cost Step 2: Select either economic benefit or loan regime Economic benefit - better at younger ages - high premium/high cash value products until crossover Loan regime - better at older ages - low premium/low cash value products Step 3: Can switch from economic benefit to loan regime at crossover (cumulative premiums = total cash values)

12 LOAN REGIME (equity collateral assignment) Employer pays premium Business owner/third party owns policy Owner collaterally assigns the cash value (not to exceed the cumulative premiums) to the employer Owner owns equity cash values (i.e. cash values in excess of premiums paid) Employer-paid premium = loan to employee If business owner/third party does not pay AFR, then interest equal to AFR is imputed If plan is terminated, employee pays back loan balance

13 ECONOMIC BENEFIT REGIME NON-EQUITY ENDORSEMENT Employer s interest in the contract is equal to the policy s cash value Employee can designate the beneficiary for his/her portion of the death benefit Employer retains control of the contract (can borrow against cash values) NON-EQUITY COLLATERAL ASSIGNMENT Employee or third party owns the policy and assigns all of the cash value back to the employer Employer pays premiums- value of life insurance is taxable income At employee s death, or termination of the agreement, employer is entitled to receive the greater of premiums paid or the policy s cash value. Used to remove proceeds from insured s estate

14 COLI Best Practices Death benefits of employerowned policies will, generally, not be taxable if: EMPLOYER: gives employee written NOTICE and gets written CONSENT from employee before policy issue. AND INSURED EMPLOYEE: Fits specified exceptions, OR death benefits fit specified exceptions

15 Circular 230 Notice Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to and cannot be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisers regarding your particular set of facts and circumstances. PEANUTS 2012 Peanuts Worldwide

16 Disclosure Metropolitan Life Insurance Company. (MLIC) New York, NY Securities offered through MetLife Securities, Inc. (MSI) Member FINRA/SIPC. MLIC and MSI are MetLife companies.

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