was in excess of $5 million. The doctors’ primary interest was twofold— first, to provide additional tax-advantaged retirement capital in addition to supplementing their qualified plans. Second, it was to provide a death benefit for their families. The doctors’ children will have fully paid policies when they turn 21, all funded with excess cash flow from the medical practice. If advisers need more information/expertise about split dollar plans, which type of expert should they contact?
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.
Voorhees: Split dollar planning is a team sport. The clients need to include their CPA, their attorney and a qualified insurance specialist who knows how to establish a leveraged plan. A more traditional split dollar program requires a high level of expertise, and the leveraged version requires additional modeling of details regarding the loan.
Using the Corporation to Fund Life Insurance for the Highly Compensated Key Takeaways • Split dollar plans are a unique way for corporations to pay for life insurance for a key employee or company owner. • A split dollar plan can be used to finance estate taxes, buy-sell arrangements, or meaningful supplemental retirement benefits for executives and their heirs.
• Advisers who take the time to understand the complex split dollar concept love it—and so do their clients. But learning its nuances requires a commitment.
Guy Baker, MBA, MSFS, MSM, was recently recognized as one of Worth Magazines’ top 250 advisers. Established in Orange County in 1970, Guy has built 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.
What advisers need to know about the power of split dollar plans. Make the commitment to understanding them or finding an expert who does. Interview with Guy Baker, BMI Consulting, and Tim Voorhees Tim, in a nutshell, what is a “split dollar” plan? Voorhees: There are two forms of split dollar plans—the loan regime (formerly collateral assignment split dollar) and the endorsement split dollar. In both cases, the corporation pays the premium on a life insurance policy for the selected participant and his or her beneficiary. With the endorsement method, the corporation owns the policy and the cash value but endorses the death benefit to the named beneficiary. With the loan method, participants or their designees (a trust or partnership, for instance) own the policy and the cash value but must repay the loan or pay tax on the loan amount at some point in the future. The participant names the beneficiary, but the corporation owns part of the death benefit (hence the name split dollar) equal to the loan. Guy, what is the primary objective of using the split dollar arrangement? Baker: Split dollar is a unique way for the corporation to pay for life insurance for the benefit of a key employee or the owner of the company. The premium is paid from the corporation’s pocketbook. The plan is both legal and economic.
Comparison of Benefits
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
Inheritance to Heirs in Year 15
$3,500,000
$4,800,000
Estste Tax in Year 15
$3,500,000
$2,000,000
Total 15 Year After-Tax Retirement Income
$1,479,000
$2,867,835
Increased Inheritance to Heirs Decreased Estate Taxes Increased Retirement Income
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. Above 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. This draft is dated 4/3/2014. The final published version may differ.
Increase to Charity
$1,3000,000 $500,000 $1,388,835 $0
If the company chooses to fund the loan regime split dollar, the imputed interest cost for the loan is determined by a special table provided by the IRS. Currently, these rates are very low. So the cost is negligible.