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The split-dollar insurance plan can be used as a method for funding a buy-sell agreement. The style of split-dollar arrangements should be coordinated with the client’s objectives and the type of buy-sell agreement being considered.
If the type of buy-sell agreement being considered is that of a stock redemption entity plan, a collateral assignment style of split-dollar would not be effective. However, an endorsement style of split-dollar could combine the repurchase of shares from the stockholder’s estate and provide for additional life insurance benefits for the personal needs of the stockholder.
For example, consider a buy-sell agreement that values the stockholder’s shares of the business at $500,000. In addition, the stockholder needs personal life insurance in the amount of $400,000. Where the corporation may purchase $500,000 of life insurance on the stockholder to cover the buy-sell agreement alone, it would now purchase $900,000 on the stockholder and enter an endorsement style of split-dollar insurance for the amount of $400,000. The stockholder would have the current economic benefit on $400,000 attributed as income each year, but not on the $500,000 of coverage retained by the employer. Upon the death of the stockholder, the employer receives $500,000 of death benefit proceeds tax-free to satisfy the terms of the stock redemption entity buy-sell agreement, and the stockholder’s named beneficiary receives the $400,000 of death benefit proceeds tax free via the policy endorsement.
If the type of buy-sell agreement being considered is that of a cross-purchase arrangement, both a collateral assignment style of split-dollar and an endorsement style of split-dollar could be effective. As in the previous example, assume that the value of the stockholder’s shares of the business is $500,000, but now we have two equal stockholders in the corporation.
With a collateral assignment style of split-dollar insurance plan as the method of funding the agreement, the difference is that the stockholders are the owners and the beneficiaries of the policy on each other’s lives. Under this scenario, the loan regime applies to the owner of the policy, even though the insured is the other stockholder. The owner of the policy is responsible for the loan, not the insured or the beneficiary. Upon the death of one of the stockholders, the surviving stockholder receives the death benefit proceeds tax-free, settles the outstanding balance of the loan to the corporation, and uses the balance of the death benefit proceeds to satisfy the terms of the cross-purchase buy-sell agreement.
With the endorsement style of split-dollar insurance plan as the method of funding the agreement, the employer applies for and owns a $500,000 policy on each of the stockholders. Each stockholder names the other stockholder as the beneficiary of the policy. Under this scenario, the economic benefit regime applies, and income is attributed to the stockholder on the life of the other individual insured stockholder.
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can you provide some details on WEALTH MANAGEMENT STRATEGIES, specificially a universiall life plan that i could go to the bank and borrow against ?
Great question regarding universal life policies, and cash value that can be borrowed against. Its such a broad subject that it would be easier to give you guidance without more background on your situation. (policy choices that are appropriate for a 45 year old don’t work for a 65 year old. Are you looking for a policy that you can overfund now and borrow against 20 years later? are you running a small business and looking for a way to shelter income inside a UL policy? are you looking for liquidity to secure a large real estate portfolio?