The drafting attorney needs to craft a split dollar agreement, collateral assignment, and life insurance trust to help the client realize the benefits illustrated during the design phase. Typically the lawyer also facilitates the funding of the capital split dollar program while working with insurance and loan underwriters. With capital gains split dollar, both the buyer and seller of a company will normally be represented by legal counsel.
About the Authors
Tim Voorhees, JD, MBA, is a principal partner at Matsen Voorhees Mintz LLP in Costa Mesa, CA. With more than 35 years of experience as an attorney and business planning adviser, Tim has helped clients save millions of dollars in taxes while transferring their legacy to their families and favorite charities. His book on tax-efficient planning is described at www. ZeroTaxCounsel.com. Feel free to email Tim at tim@vfos.com.
New Twist on Split Dollar Key Takeaways • Capital Split Dollar (CSD) allows companies to take current interest deductions on borrowed money when the funds are used to purchase life insurance as part of a compliant compensation program. • CSD allows companies to loan capital to the owner, children, spouse and key management for the purpose of buying life insurance coverage.
What are next steps?
Guy Baker, MBA, MSFS, MSM, was recently recognized as one of Worth Magazines’ top 250 advisers. Established in Orange County in 1970, Guy hasbuilt a financial service company serving the needs of business owners who are looking to have a trustworthy relationship to help them manage their Three Circles ofWealth.
GB: Insurance professionals need to look for business owners who want to reduce taxes while maximizing after-tax benefits for key executives or successor owners. Producers should have experienced team members who can facilitate integrated design, drafting and funding solutions. If advisers would like more education, they can request copies of past articles we’ve written about split dollar written by the authors of this article or email the Elite Adviser Forum with questions that they want answered in future articles.
Matsen Voorhees Mintz LLP 695 Town Center Drive, 7th Floor, Costa Mesa, CA 92626 Phone: 800-447-7090 or 949-878-9400 • Fax: 866-447-7090 Email: info@MVMLawyers.com
Readers of this document should consult with independent advisers regarding the tax, accounting and legal implications of the proposed strategies before any strategy is implemented. Nothing in this presentation is intended to offer securities or investment advice. Case study numbers are based on a hypothetical fact pattern. Tax and regulatory rules affecting strategies in this document may change often and have varying interpretations. To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or for promoting, marketing or recommending to another party any matters addressed herein.
• CSD enables companies to loan funds from its retained earnings (or Accumulated Adjustments Account), or it can arrange a loan from an outside lending source. • Using CSD can substantially reduce a family’s tax liability by converting capital into income through policy loans and a death benefit. • CSD is also a great technique for equalizing estate benefits among children who do not participate in the family business. • CSD can help a business seller defer recognition of capital gains and receive tax-free income in lieu of taxable income when transferring a business to a third party or the next generation. Such capital gains planning is referred to as Capital Gains Split Dollar (CGSD).
Using CSD to facilitate the sale of a business in a way that minimizes capital gains taxes Interview with Guy Baker, BMI Consulting, and Tim Voorhees Originally published on CEGWorldwide.com in 2013.
Due to great interest in this topic last month, Elite Adviser Report reconnected with Guy Baker and Tim Voorhees to dive deeper into the nuances of CSD. Guy is a co-developer of the Capital Split Dollar program. Tim Voorhees is one of the top estate and business attorneys in the country. They have combined efforts to create a new concept called “Capital Gains Split Dollar.” This interview explores the merits of capital split dollar and a new twist--using split dollar to facilitate the sale of a business in a way that minimizes capital gains taxes. Tim, remind us about capital split dollar. Voorhees: As we discussed in our previous interview, split dollar is not a new concept. It has been in existence since the 1950s. It was one of the most popular benefit strategies used by large, publicly traded companies to provide meaningful estate and income protection to C Level executives. It was discontinued when the 2002 Sarbannes Oxley Act disallowed loans from public corporations to officers of those companies. CSD is a permutation of this popular strategy for closely held businesses. It allows the company to loan capital to the owner, children, spouse and key management for the purpose of buying life insurance coverage. The company can loan funds from its retained earnings (or Accumulated Adjustments Account), or it can arrange a loan from an outside lending source. What are the primary ways a corporation can help the owner by using CSD? Baker: Fundamentally, insurance is protection against a premature death. Any time there is a liability, life insurance can provide cheap dollars to fund the liability in a tax-efficient manner. This is true for providing estate tax liquidity, funding the “buy sell” between shareholders or partners, and creating income at retirement for top executives. CSD can even be used to mitigate the high cost of transitioning a business interest among family members. For example, through the creative