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Retirement Planning Tools:

If you are a party to a collateral assignment "equity" split-dollar plan, you may have a unique opportunity to achieve significant income tax savings.

A split-dollar life insurance arrangement can be between:

• an employer and an employee,

• a business and a shareholder or partner,

Now the Internal Revenue Service (IRS) is in the process of changing the way split-dollar plans are characterized and taxed.

Split-dollar plans that are entered into before the proposed regulations are finalized and published will not be affected by the new regulations, unless they are materially modified after the new regulations are finalized and published. The IRS has not provided any guidance on what constitutes a "material modification".

However, the IRS has granted unique transitional relief for parties to split-dollar plans that were in place before January 28, 2002, in the form of three unique safe harbors. Generally, if you were a party to a split-dollar plan before January 28, 2002, you may be in a unique position to achieve significant income tax savings by exercising one of these safe harbors. However, you must act before January 1, 2004.

1. Do Nothing

Maintain your equity split-dollar plan:

If you maintain your split-dollar plan "as is", and treat and report the value of the current life insurance protection as an economic benefit, the IRS has said that as long as the parties treat and report the value of the current life insurance protection as an economic benefits, it will not treat the arrangement as having been terminated, and assert that there has been a transfer of property to the benefited person by reason of termination of the arrangement.

It is important to note that the IRS has stated there is "no inference" regarding the Federal income, employment and gift tax treatment of equity that accrues in these split-dollar policies after the final regulations have been published.

2. Terminate your equity split-dollar plan:

You can elect to terminate your plan without having to recognize the equity that has accrued inside your life insurance policy as taxable income. However, in order to properly terminate the plan, you must repay the employer (or Sponsor, in a private split-dollar plan) the cumulative employer premium investment, and report the transaction, for tax purposes,in a manner that is consistent with the Internal Revenue Code.

3. Convert your equity split-dollar plan to a loan arrangement:

You could elect to convert your plan to a 'loan arrangement', without having to recognize the equity that has accrued inside your life insurance policy as taxable income. To properly convert the plan to a loan arrangement, you must either repay the entire amount that is payable to the employer (or Sponsor, in private split-dollar plans), or treat and report the debt as a loan.

Your split-dollar plan was designed to address your particular business and/or personal planning needs and objectives. Likewise,your decision concerning an appropriate exit or transition strategy should be based on a thorough analysis of your particular situation.

The decision as to, which, if any, of the safe harbors is appropriate for you, can only be determined after a thorough consideration of several important factors, including the gift, income and employment tax implications. In addition, the exercise of any of these safe harbors has its own attendant financial considerations, such as the identification of sources of funds from which to repay employers (or Sponsors, in private split-dollar plans). Furthermore, there are a number of ways in which to implement the safe harbors, depending on your particular situation.

A Word About Replacement of Life Insurance

In some cases, it may be in your best interest to maintain an existing policy. However, under certain circumstances, a replacement transaction may be appropriate. Making a decision to replace an exiting policy can be a complicated process. You and your personal advisors should consider your short- and long-term planning needs and objectives, the type of policy being modified or replace, as well as compliance and other considerations including:

• Whether your objectives can be more effectively addressed by keeping or modifying the existing policy;

• The effect of a replacement on future premium payment obligations;

• A comparison of the guaranteed and nonguaranteed elements of the existing and proposed policies;

• The impact of surrender charges that may be assessed on existing and proposed policy values.

Informed decisions require careful analysis

We are available to help you review the life insurance policies that are an important part of your split-dollar plan. We can help assess the potential financial impact of the Notice 2002-8 safe harbors on your business and financial planning objectives.

Contact the Pension Professionals of Florida today to determine how best to protect your assets.