Legal Memorandum: Split-dollar Life Insurance Plans

Issue: Under federal law, if an employer amends an employee life insurance benefit program and no longer requires employees to contribute to the premiums and offers a lump-sum payment as reimbursement for previous premiums paid, are there alternative ways of distributing the lump-sum payment to minimize tax consequences?

Area of Law: Insurance Law
Keywords: Split-dollar life insurance plan; Unfavorable tax consequences
Jurisdiction: Federal
Cited Cases: None
Cited Statutes: None
Date: 02/01/2001

Brad Kaplan’s July 1997 article on the implications of P.L.R. 9604001 presents several scenarios and suggests alternative ways of structuring a split-dollar life insurance plan to avoid unfavorable tax consequences under the letter ruling.  See Kaplan at 34-36.  The employer may wish to evaluate some of these options.  See also the box entitled "Advice for Clients Considering Split-Dollar Plans" in Charles L. Ratner, The IRS Fires an Attack on Equity Split-Dollar, 135 Trusts & Est. 14, 15 (Apr. 1996) and the alternatives presented in Peter I. Elinsky & Mark T. Watson, Taxation of Equity Split-Dollar Arrangements, 27 Tax Advisor 348, 349-51 (1996).  For additional discussion of the different forms of split-dollar arrangements, see Lawrence Brody et al., Insurance- Related Compensation,  Tax Mgmt. Portfolio No. 386-2d (BNA), at A-52 to -58 (1997).


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