Endorsement Split Dollar with Salary Continuation Using Indexed Universal Life

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Charles Jennings
5 years ago
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Preface Of all the strategies used by employers to provide significant amounts of life insurance for the protection of the families of valuable executives as well as substantial retirement benefits

1 Preface Of all the strategies used by employers to provide significant amounts of life insurance for the protection of the families of valuable executives as well as substantial retirement benefits for the executive, this variation is most efficient. With this arrangement, the policy is issued on the executive's life and owned by the employer. values and benefits are allocated as follows: The employer owns all cash values which are carried as an asset on its books. (The employer's outlay is simply a transfer from the firm's "cash account" to "cash value account".) The employer has access to cash values through the policy's withdrawal and/or loan provisions. The employer's death benefit is equal to its cumulative premiums paid or, if greater, an amount equal to the policy cash value. Through use of a policy endorsement, the executive's beneficiaries are entitled to receive a portion of the policy death benefit. The documentation for the plan calls for the employer to pay a retirement income benefit to the executive (typically referred to as "salary continuation"). In addition to the salary continuation benefit, the arrangement may also include continuing the executive's share of the policy death benefit for a specified term of years after retirement or, in some cases, indefinitely. Alternatively, the executive's share of the death benefit may revert to the employer which, in turn, may use a portion of it to fund a survivor income benefit to the executive's family should the executive die prior to receiving all the scheduled salary continuation. Plan s Employer's Cash Flow $4M Empl Cum. Pmts Exec Cum. Pmts $4M Cum. Loans 3M 3M $3,249,24 2M 2M 1M $764,281 $ Yrs M Yrs Employer's Values Executive's Values $4M Cash Value $4M Cum. A/T ² 3M 3M $3,2, 2M 1M $2,72,667 $1,688,77 2M 1M Yrs Yrs $ 1 To fund the executive's after tax salary continuation. 2 To the executive at retirement. Note: The after tax effects of bonuses are included in the cumulative net payments of both the employer and the executive. Page 1 of 17

2 Preface (continued) Split dollar plans have yearly income tax ramifications for the covered executive. Unless an offsetting payment is made, an executive covered with this type of arrangement is in receipt of a taxable economic benefit to the extent relief is provided from paying premiums personally. Since any premium payment by the executive results in taxable income to the employer (Reg. Section (f)(ii)), the accompanying illustration assumes that the executive pays no share of the premium. As a result, the executive will be in receipt of imputed income each year based on the attained age rates contained in Table 21 (issued as part of IRS Notice 21-1). This income consequence is illustrated in the accompanying reports including a bonus from the employer to help offset the income tax that results. Extensive life insurance coverage for the executive, combined with an impressive array of cash values for the employer, constitute a program that should be financially compelling to both employer and executive. Note: The Final Split Dollar Regulations (68 FR 54336) issued in September 23 should have no adverse impact on this plan as illustrated; however, in all cases, the approval of a client's legal and tax advisers must be secured regarding the implementation of any form of split dollar. Page 2 of 17

3 Who Pays What - Who Receives What Employer Pays Executive Pays Share 1 Bonus Tax 2 IRS Life Insurance Employer Receives Executive Receives Loans 3 Cash Value To the executive at retirement. 2 See Executive's Analysis page for details. 3 To fund the executive's after tax salary continuation. 4 Equal to remaining balance after employer's portion is deducted. Page 3 of 17

4 Summary of Costs and s Form of Transaction (Endorsement) Employer's 34.% Executive's 35.% 7.5% E m ploye r E xe cutive Cumulative s Cash Value* (4) Share of (5) (6) (7) Share of ,88 11,88 31,17 2, 2,, ,187 22, , ,96 2,, ,31 33, ,527 41,713 2,, ,47 44, , ,127 2,, ,514 56, , ,723 2,, ,635 68, ,48 764,65 2,, ,791 79,923 76,46 94,627 2,, , ,92 813,18 953,34 2,, , ,194 87,7 1,6,16 2,, , , ,35 1,63,5 2,, ,95 719,738 1,4,16 1,132,33 2,, , ,64 1,81,78 1,25,92 2,, , ,76 1,164,51 1,284,643 2,, ,23 73,783 1,252,713 1,368,84 2,, ,37 735,9 1,346,757 1,458,877 2,, , ,717 1,446,86 1,554,997 2,, ,54 744,771 1,549,453 1,657,59 2,, ,658 75,429 1,658,91 1,767,47 2,, , ,882 1,775,637 1,883,773 2,, , ,281 1,9,63 2,8,2 2,, ,281 1,827,973 2,494,68 16, ,281 1,785,233 2,39,88 16, ,281 1,743,817 2,185,26 16, ,281 1,74,36 2,148,597 16, ,281 1,665,797 2,111,437 16, ,281 1,629,22 2,74,77 16, ,281 1,595,47 2,8,693 16, ,281 1,565,13 1,939,65 16, ,281 1,538,787 1,867,373 16, ,281 1,517,43 1,791,52 16, 764,281 1,6, Split dollar arrangement presumed terminated in year 2. *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. 3 Summary Employer's Cum. s 764,281 Employer's Cash Value 1,517,43 Employer's 1,791,52 Executive's Cum. s Executive's Cum. A/T 1,6, Executive's Page 4 of 17

5 Summary of Costs and s Form of Transaction (Endorsement) Employer's 34.% Executive's 35.% 7.5% E m ploye r E xe cutive Cumulative s Cash Value* (4) Share of (5) (6) (7) Share of ,281 1,54,93 1,716,283 16, ,281 1,497,73 1,722,317 16, ,281 1,496,2 1,734,933 16, ,281 1,5,547 1,754,963 16, ,281 1,512,1 1,783,187 16, ,281 1,531,83 1,82,36 16, ,281 1,556,72 1,867,33 16, ,281 1,591,147 1,924,59 16, ,281 1,634,957 1,992,82 16, ,281 1,688,77 2,72,667 16, 764,281 3,2, Split dollar arrangement presumed terminated in year 2. *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. 4 Summary Employer's Cum. s 764,281 Employer's Cash Value 1,688,77 Employer's 2,72,667 Executive's Cum. s Executive's Cum. A/T 3,2, Executive's Page 5 of 17

6 A Look at 4 Employer Executive 764,281 Cumulative s 3,2, Cumulative 1 1,688,77 2,72,667 Cash Value Split Dollar Arrangement Presumed Terminated in 2 1 To the executive at retirement. Note: The after tax effects of bonuses are included in the cumulative net payments of both the employer and the executive. Page 6 of 17

7 4 Analysis Plan s Employer's Cash Flow $4M Empl Cum. Pmts Exec Cum. Pmts $4M Cum. Loans¹ 3M 3M $3,249,24 2M 2M 1M $764,281 1M $ Yrs Yrs Employer's Values Executive's Values $4M Cash Value $4M Cum. A/T ² 3M 3M $3,2, 2M 1M $2,72,667 $1,688,77 2M 1M $ Yrs Yrs To fund the executive's after tax salary continuation. 2 To the executive at retirement. Note: The after tax effects of bonuses are included in the cumulative net payments of both the employer and the executive. Page 7 of 17

8 Employer's 4 Analysis $2,8, $2,1, $2,72,667 $1,688,77 $1,4, $7, $764,281 $ s At 4 Employer's Cumulative s $764,281 Employer's Cash Value $1,688,77 Employer's $2,72,667 Note: The after tax effects of bonuses are included in the cumulative net payments of both the employer and the executive. Page 8 of 17

9 Executive's 4 Analysis $3,6, $3,2, $2,7, $1,8, $9, $ $ $ s At 4 Executive's Cumulative s $ Executive's Cumulative $3,2, Executive's $ Note: The after tax effects of bonuses are included in the cumulative net payments of both the employer and the executive. Page 9 of 17

10 Employer's Analysis Form of Transaction (Endorsement) Employer's 34.% 7.5% Split Dollar Share Cum. Split Dollar Share Bonus to Executive (4) Cost of Bonus (5) Paid to Executive (6) Cost of (7) Loan Proceeds (8) +(4)+(6)-(7) (9) Cumulative s , 1, 1,648 1,88 11,88 11, , 2, 1,798 1,187 11,187 22, , 3, 1,971 1,31 11,31 33, , 4, 2,132 1,47 11,47 44, , 5, 2,294 1,514 11,514 56, , 6, 2,477 1,635 11,635 68, , 7, 2,714 1,791 11,791 79, , 3,26 1,997 1, , , 3,446 2,274 2, , , 3,931 2,594 2, , , 4,469 2,95 2,95 719, , 5,4 3,326 3, , , 5,6 3,696 3, , , 6,95 4,23 4,23 73, , 6,526 4,37 4,37 735, , 7,11 4,627 4, , , 7,657 5,54 5,54 744, , 8,572 5,658 5,658 75, , 9,778 6,453 6, , , 11,211 7,399 7, , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , ,281 7, 97,396 64,281 2,461,55 1,624,62 1,624,62 764,281 *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Split dollar arrangement presumed terminated in year 2. Page 1 of 17

11 Employer's Analysis Form of Transaction (Endorsement) Employer's 34.% 7.5% Split Dollar Share Cum. Split Dollar Share Bonus to Executive (4) Cost of Bonus (5) Paid to Executive (6) Cost of (7) Loan Proceeds (8) +(4)+(6)-(7) (9) Cumulative s , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , , , 246, , , ,281 7, 97,396 64,281 4,923,1 3,249,24 3,249,24 764,281 *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Split dollar arrangement presumed terminated in year 2. Page 11 of 17

12 Executive's Analysis Form of Transaction (Endorsement) Executive's 35.% 7.5% Split Dollar Share Additional Taxable Value of * Bonus Received (4) Taxable + (5) Tax Due on Col (4) (6) - + (5) (7) from Employer (8) ,6 1,648 4,78 1, ,34 1,798 5,138 1, ,66 1,971 5,631 1, ,96 2,132 6,92 2, ,26 2,294 6,554 2, ,6 2,477 7,77 2, ,4 2,714 7,754 2, ,62 3,26 8,646 3, ,4 3,446 9,846 3, ,3 3,931 11,231 3, ,3 4,469 12,769 4, ,36 5,4 14,4 5, ,4 5,6 16, 5, ,32 6,95 17,415 6, ,12 6,526 18,646 6, ,2 7,11 2,31 7, ,22 7,657 21,877 7, ,92 8,572 24,492 8, ,16 9,778 27,938 9, ,82 11,211 32,31 11, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, 18,88 97, ,276 97,396 2,461,55 1,6, *Assuming column offsets the economic benefit. This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Split dollar arrangement presumed terminated in year 2. Column is the imputed economic benefit in compliance with IRS Notice (Table 21 rates utilized.) Page 12 of 17

13 Executive's Analysis Form of Transaction (Endorsement) Executive's 35.% 7.5% Split Dollar Share Additional Taxable Value of * Bonus Received (4) Taxable + (5) Tax Due on Col (4) (6) - + (5) (7) from Employer (8) ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, ,155 16, 18,88 97, ,276 97,396 4,923,1 3,2, *Assuming column offsets the economic benefit. This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Split dollar arrangement presumed terminated in year 2. Column is the imputed economic benefit in compliance with IRS Notice (Table 21 rates utilized.) Page 13 of 17

14 Executive's Personal Report Form of Transaction (Endorsement) Executive's 35.% 7.5% Executive's Costs Executive's Values Executive's Share of ,, ,, ,, ,, ,, 6 5 2,, ,, ,, ,, ,, ,, ,, ,, ,, ,, ,, ,, ,, ,, ,, , , , , , , , , , , 1,6, This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Page 14 of 17

15 Executive's Personal Report Form of Transaction (Endorsement) Executive's 35.% 7.5% Executive's Costs Executive's Values Executive's Share of , , , , , , , , , , 3,2, This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Page 15 of 17

16 Illustration of Values Funding the Plan Employer's 34.% 7.5% Initial 1, Initial 2,2, Loan Proceeds Cash Value* Increase (4) End Cash Value* (5) , 31,17 31,17 2,2, , 11,66 132,767 2,296, , 18,76 241,527 2,41, , 116,42 357,947 2,514, , 124,6 482,547 2,634, , 133, ,48 2,764, , 143,98 76,46 2,94, ,72 813,18 2,953, ,827 87,7 3,6, , ,35 3,63, ,81 1,4,16 3,132, ,62 1,81,78 3,25, ,73 1,164,51 3,284, ,23 1,252,713 3,368, ,44 1,346,757 3,458, ,13 1,446,86 3,554, ,593 1,549,453 3,657, ,457 1,658,91 3,767, ,727 1,775,637 3,883, ,426 1,9,63 4,8, ,462-72,9 1,827,973 2,494, ,462-42,74 1,785,233 2,39, ,462-41,416 1,743,817 2,185, ,462-39,457 1,74,36 2,148, ,462-38,563 1,665,797 2,111, ,462-36,577 1,629,22 2,74, ,462-33,75 1,595,47 2,8, ,462-3,34 1,565,13 1,939, ,462-26,343 1,538,787 1,867, ,462-21,744 1,517,43 1,791,52 7, 1,624,62 3 Summary *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Cum. s 7, Cum. Loan Proceeds 1,624,62 Cash Value 1,517,43 1,791,52 Page 16 of 17

17 Illustration of Values Funding the Plan Employer's 34.% 7.5% Initial 1, Initial 2,2, Loan Proceeds Cash Value* Increase (4) End Cash Value* (5) ,462-12,113 1,54,93 1,716, ,462-7,2 1,497,73 1,722, ,462-1,71 1,496,2 1,734, ,462 4,527 1,5,547 1,754, ,462 11,463 1,512,1 1,783, ,462 19,73 1,531,83 1,82, ,462 25,637 1,556,72 1,867, ,462 34,427 1,591,147 1,924, ,462 43,81 1,634,957 1,992, ,462 53,75 1,688,77 2,72,667 7, 3,249,24 4 Summary *This illustration assumes the nonguaranteed values shown accompanied by a proposal from Sample Life. Cum. s 7, Cum. Loan Proceeds 3,249,24 Cash Value 1,688,77 2,72,667 Page 17 of 17

Loan-Based Split Dollar

Loan-Based Split Dollar -Based Split Dollar Preface This executive fringe benefit involves a series of employer-sponsored loans to a valued executive for the purpose of purchasing a cash value life insurance policy. It is designed