2001 Visitor Bulletin                                                            January 10, 2001

 

RE:  IRS Issues New Guidance on Split Dollar

 

On January 9^th the IRS issued Notice 2001-10, which provides interim guidance on the income tax treatment of split dollar arrangements.

 

The Notice focuses on equity split dollar and PS 58 rates.  Here are the key points:

 

1. The Notice provides interim guidance on the income taxation of split dollar pending publication of further guidance, and requests taxpayer comments by April 29, 2001.

 

2. The taxation of equity split dollar must fully account for all economic benefits conferred on the employee.  The economic benefits include the life insurance protection and the positive return on the employer’s investment in the life insurance policy.  The employee’s growing interest in the cash value may be taxed under the interest-free loan rules of section 7872 or the property transfer rules under section 83.  In a typical collateral assignment split dollar plan the employee is the beneficial owner of the policy from the inception of the arrangement, and there is no transfer of property under section 83.  Thus, 7872 is more likely to apply.

 

3. PS 58 rates overstate the value of the policy benefits allocated to the employer in reverse split dollar plans.  Rev. Rul. 55-747 is revoked and the IRS will no longer accept PS 58 rates as the proper measure of the value of current life insurance protection for Federal tax purposes.  However, taxpayers may continue to use PS 58 rates for the balance of 2001.

 

4.       A new table of premium rates, “Table 2001,” is contained in the Notice.

 

5.       For periods after December 31, 2003, the IRS will not consider an insurer’s published premium rates to be available to all standard risks who apply for term insurance unless (i) the insurer makes the availability of such rates known to persons who apply for term coverage, (ii) the insurer regularly sells term insurance at such rates, and (iii) the insurer does not more commonly sell term insurance at higher premium rates to individuals that the insurer classifies as standard risks.

 

Comment

 

Existing split dollar plans will have to be reviewed:

1. Is the plan an equity plan?
2. Has any equity developed yet?
3. What is the economic impact of re-characterization under sections 7872 or 83?
4. Should the plan be continued?
5. Should the plan be amended to a non-equity plan?
6. Should the plan be terminated?  How will the rollout be funded?

 

These and other questions will have to be addressed for clients with split dollar arrangements.

Please feel free to contact me if you have any questions about the Notice or about split dollar plans.

 

Lee Slavutin, MD, CPC, CLU

Tel: (212) 536-6025   Fax: (212) 536-6043  

Contact me by e-mail on our Visitor Ledger

 

If you want more information on this subject, please contact Lee Slavutin at (212) 536-6025.  This bulletin is designed to provide accurate and authoritative information in regard to the subject matter covered.  It is distributed with the understanding that Stern Slavutin-2 Inc. is not engaged in rendering legal or accounting services.  If legal or accounting advice is required, the services of a lawyer or accountant should be sought.