Loan split dollar remains one of those advanced market strategies that engenders two distinct reactions among financial professionals. One reaction sees nearly unlimited opportunity in the executive business market, while another relegates this concept to the esoteric and inapplicable. Though the latter reaction may be natural for those still stuck in an early 2000s mindset, today’s financial professionals would be remiss if they didn’t seize this impactful strategy and place it in their executive benefit toolkit.
The particulars of this technique (sometimes called collateral assignment split dollar) are beyond the constraints of this piece, but a synopsis of the “Why” behind loan split dollar will help to explain the rationale and provide a brief review of this executive benefit strategy.
| Andrew Rinn, , JD, CFP, CLU, ChFC Assistant Vice President of Advanced Strategies Sammons Financial Group |
Retaining and rewarding key employees can be difficult under the best of circumstances.
Recent economic events have only amplified this dilemma for business owners. Companies have traditionally reacted to this in two ways:
Each has its own merits. The bonus arrangement provides an immediate tax deduction but offers the employer little control. It can also add further to the tax burden of an overtaxed key employee. Alternatively, the deferred compensation strategy can layer in unnecessary cost and complication for the employer although it provides significant control.
Loan split dollar may offer an approach that is the best of both worlds. The cost and complexity of deferred compensation arrangement can be avoided while retaining a measure of control through cost reimbursement. Furthermore, some of the simplicity and flexibility of a bonus arrangement can be maintained.
How does it work?
In this concept, a key executive will own a life insurance contract and collaterally assign policy values to the employer to secure repayment of an employer’s premium advances. Because the employee already owns the contract, and is obligated to repay the employer, these premium advances are treated as nontaxable loans. Furthermore, any remaining equity built up remains untaxed. Of course the executive is subject to the normal distribution tax rules for a personally held life insurance policy.
As each premium payment is treated as a separate loan, the interest must be accounted for. This interest must be treated as imputed income or the employee must pay an adequate rate of interest using the appropriate applicable federal rate (AFR), published regularly by the government.
This alone can be a reason to hit the “go button” on this impactful executive benefit. However, it’s just the tip of the iceberg.
Part of the loan split dollar renaissance story now involves tax-leveraged strategies for owners of C Corporations seeking to separate their personal wealth from their business wealth. In addition, changes in the tax code courtesy of the 2017 Tax Cuts & Jobs Act, incentivize certain applicable tax-exempt organizations to provide loan split dollar to top employees. By doing so, these same organizations may avoid a 21% excise tax for compensation paid to highly compensated employees earning over $1 million. This presents a large opportunity for institutions employing doctors, hospital administrators, coaches, and athletic directors.
Loan split dollar may be the perfect fit for the hard-to-please business owner seeking that ideal executive benefit for their top talent. Adding loan split dollar to your toolkit may place you in the driver’s seat in front of your highest value clients.
Learn more about loan split dollar through Midland National’s comprehensive agent and client materials.
Author: Andrew Rinn, JD, CFP, CLU, ChFC, is the Assistant Vice President of Advanced Strategies at Sammons Financial Group.
1864MM-1 FOR AGENT USE ONLY. NOT TO BE USED FOR CONSUMER SOLICITATION PURPOSES. 3-25
The parties to the loan split dollar arrangement should seek their own independent legal and tax advice as to whether and how to enter into a loan split dollar arrangement based on the employer’s and employee’s unique circumstances.
Under a loan split dollar agreement, the employee enters into an agreement with the employer. Midland National Life Insurance Company is not a party to this agreement and Midland National’s only obligation is to administer the policy it issues (consistent with the policy’s terms and conditions).
Under a split dollar agreement, classified as a welfare benefit plan, the employee must belong to a select group of management, which includes quantitative and qualitative elements. To meet the quantitative standard, plans should be limited to the top 15% of the workforce. To meet the qualitative test, a significant disparity should exist between the average compensation of the top-hat group and the average compensation of all other employees."
To ensure the death benefit proceeds of any employer-owned policy retains its tax-favored treatment, it is essential to comply with the notice and consent requirements of IRC Section 101(j).Under a loan split dollar agreement, the employee enters into an agreement with the employer. Midland National® Life Insurance Company is not a party to this agreement and Midland National’s only obligation is to administer the policy it issues (consistent with the policy’s terms and conditions).
While the primary use of life insurance is death benefit protection, your clients may also have other needs that can be met through life insurance. The sales concepts and accompanying marketing materials may help you broaden your sales potential. As independent contractors, it is up to you to choose which of these concepts may work for your particular sales strategy and clients, and which do not. Please note that Midland National does not require you to use any of these sales concepts; they are resources that can be used at your discretion for your own individualized sales presentations.
Sammons Financial® is the marketing name for Sammons® Financial Group, Inc.’s member companies, including Midland National® Life Insurance Company. Annuities and life insurance are issued by, and product guarantees are solely the responsibility of, Midland National Life Insurance Company.