Heads-Up To Business Owners With Split Dollar Life Insurance (12/03)

MEDIA BRIEFING

INTERNATIONAL PROFIT ASSOCIATES/International Tax Advisors Group

BUSINESS & TAXING PLANNING UPDATE, Year end 2003

Media Background and source information

The following is an advisory for businesses and individuals who are reviewing their year-end 2003 and fiscal 2004 finances. You are invited to consider this in all or part for inclusion in an article or column you are preparing. For further information, additional explanation or specific examples of how these strategies can and are being implemented, please call me at (847) 509-5777. Please credit International Profit Associates, Inc., of Buffalo Grove, Il., Craig Koop, Director of Implementation, International Tax Advisors, Inc. Damon Park, Tax Analyst, International Tax Advisors Inc., and the company’s tax advisory services group, also contributed to the briefing.

HEADS-UP TO BUSINESS OWNERS WITH SPLIT DOLLAR LIFE INSURANCE

Business owners with split-dollar life insurance policies need to review the funding of those commitments and consider several actions by year-end in response to new tax regulations.

A split-dollar life insurance arrangement describes a method of paying for insurance by splitting the cost of life insurance premiums between the employer and the business owner/employee, and then subsequently splitting the proceeds of the benefit payout between the employer and the business owner/employee. Generally, where the business pays the premiums for the benefit of the business owner/employee, the business owner will report taxable income for the value of the current year’s life insurance protection. At death, the business owner’s designated beneficiaries will receive the death benefit, less the total premiums paid by the business. In some circumstances, the business will receive the cash surrender value on the policy.

In an effort to close what the Internal Revenue Service perceived as a "back door" to provide tax-free executive compensation, final regulations have been published that alter the tax treatment of such arrangements. The new regulations provide that the tax treatment for split-dollar life insurance arrangements will be determined under one of two sets of rules, depending on who owns the policy.

"It is important that these policies be reviewed since there maybe a significant impact on a policy-holders income and tax for 2004 and beyond," said Craig Koop, Director of Implementation for International Tax Advisors Inc.

First, an arrangement where the employer owns the policy, the employer’s premium payments are treated as providing an economic benefit to the employee. Such economic benefits would include the employee’s interest in the cash surrender value and the value associated with the current life insurance protection. This benefit may be characterized as compensation, dividends, or even as a gift, depending on the circumstances.

Under a second set of rules, where the employee owns the policy and the employer makes the premium payments, the funds used to pay the premiums are treated as loans to the employee. Each premium payment is treated as a separate loan to the employee for tax purposes. As such, the employee will be required to pay a market rate of interest on the loan, or face being taxed on the difference between the actual interest rate charged and the applicable market-rate.

"These new regulations apply to transactions entered into or materially modified after September 17, 2003. For arrangements that were in existence before that date, Notice 2002-8, which was issued on January 3, 2002, provides some transitional rules. It is important to note that these rules require the taxpayer to take specific action before January 1, 2004, to avoid the income tax treatment provided under the final regs.," Koop added.

For split-dollar arrangements entered into before January 28, 2002, where an employer (sponsor) has made premium or other payments, and is entitled to receive full reimbursement for those payments, the IRS will not take the position that there has been a taxable transfer of property to the employee (or other benefited person) upon termination of the arrangement if the following conditions are met:

1. The arrangement is terminated before January 1, 2004, or
2. For all periods beginning on or after January 1, 2004, all payments by the employer since the inception of the arrangement (reduced by any repayments to the employer) are treated as loans for Federal income tax purposes, and the parties to the arrangement report the tax treatment in a manner consistent with loan treatment. For those payments made by the employer before the first taxable year in which the payments are treated as loans for Federal tax purposes, those payments will be treated as loans entered into at the beginning of that first year.

As a result, taxpayers that are a party to a split-dollar arrangement that was entered into before January 28, 2002, should consult their tax professional before year end to determine the best course of action with respect to continuing or terminating this arrangement.

International Profit Associates, Inc., is the nation’s leading consultant to small and medium sized businesses. The company and its affiliates, including International Tax Advisors, Inc., have served more than 100,000 clients since 1991. More information about the company may be found at www.ipa-iba.com.

International Tax Advisors, Inc. provides strategic tax planning services, and representation of clients in resolving matters with tax collection agencies in the United States and Canada. The clientele is composed of a diverse group of businesses (including both established and emerging companies) and their individual owners. Additional information, including a comprehensive resource center, may be found at www.internationaltaxadvisors.com.

Craig Koop is Director of Implementation for International Profit Associates, Inc., and its International Tax Advisors, Inc., division. Mr. Koop is responsible for developing tax strategies for middle-market businesses and their entrepreneurial owners. Mr. Koop is a CPA and JD having both his undergraduate degree from DePaul University and his law degree from the DePaul College of Law. In addition, Mr. Koop has a masters of science degree in taxation from the DePaul University Kellstadt Graduate School of Business.

Mr. Koop’s distinguished career includes positions with Hinshaw & Culbertson where he was in the tax and estate planning group of the Chicago-based law firm; KPMG where he served Fortune 500 clients as a member of the international accounting and consulting firm’s strategic tax planning group; and Deutsche Financial Services where he handled all aspects of their tax compliance and planning in the 50-state U.S. tax environment and in Canada.

International Profit Associates, Inc., and International Tax Advisors, Inc., provides this information for the benefit of your readers. Every effort has been made to ensure that all information contained herein is accurate per the date of its original distribution, however, this information is subject to change. Furthermore, it is important to understand and convey that the tax and financial planning situation and needs of each business and individual is likely to be different. As a result, you and your readers should always contact your tax advisor to obtain proper professional advice before any action is taken.

International Profit Associates and its related entities cannot be held responsible for any loss incurred as a result of the use of this information. Should this information be presented on the Internet, International Profit Associates and its related entities assumes no responsibility whatsoever for the content of those web sites. Moreover, the addition of this information on those sites does not represent an approval or endorsement of those products or services unless expressly approved and granted by International Profit Associates.

Questions and comments should be forwarded to Raymond Minkus (847) 509-5777 or to rdm@minkuspr. com on behalf of International Profit Associates, Inc.