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Now that the flat tax rate for C-Corporations has reduced to 21% (from as high as 35%) thanks to the Tax Cuts & Jobs Act, split dollar plans have once again become an attractive solution for business owners, and high-income earners.

Simply put, a split dollar plan utilizing life insurance (which is a crucial factor that I will explain) can help business owners save taxes now and leverage low corporate taxes while allowing them to access tax-free income later.

Split Dollar Advantages

It’s no secret that a split dollar plan benefits not only key-employee(s), but even more so a business owner.

A split dollar plan provides business owners with the flexibility to choose a key-employee(s) or just for themselves as well as the versatility to have a different benefit for each.

A split dollar plan is relatively easy to establish (IRS approval is not required, and administration is minimal.) Additionally, the plan’s cost basis is treated as an asset of the business. In other words, the life insurance policy cost basis is an asset on the business’ balance sheet, and the cash value growth is owned by the participant on a tax-deferred basis.

Who is a Fit?

Before we get into why one would implement a split dollar plan utilizing life insurance, let’s cover who is a fit for this type of strategy (trust me, this won’t take long). Your clients or prospects who are a fit for a split dollar plan should have two key characteristics:

  • They have an annual income of $500,000+ OR owns a C-Corp
  • Are under 60 years of age

It’s that easy. Now, why life insurance?

Why Life Insurance?

There are 4 main reasons why I would recommend utilizing life insurance in a split dollar plan:

  1. Life insurance allows flexible participation and contributions
    • Ability to choose who will participate
    • No government restrictions on contributions
  2. Life insurance has a small impact on the business balance sheet
    • Maintain balance sheet stability
    • Control timing of funds moving on or off the balance sheet
  3. Life insurance minimizes their personal out-of-pocket and tax cost
    • Tax efficient programs for the contribution, accumulation, and distribution phases of the plan
  4. Life insurance provides the potential to accumulate funds for retirement
    • Potential for tax-free income
    • Alleviates concern of outliving income sources

What features does life insurance have that allow it to serve in these 4 key-areas? Cash value life insurance, specifically indexed universal life (IUL) insurance, is a powerful tool that can be used to grow funds without significant tax consequences because IUL products:

  • Have income-tax-deferred growth of values
  • Are not subject to IRS contribution limits
  • Do not have a 10% penalty for early access
  • Do not have Required Minimum Distributions (RMDs)
  • Are creditor protected (in most states)
  • Have an income-tax-free death benefit

How does it work?

A Split Dollar plan utilizing life insurance is actually relatively easy to set-up and administer. We have recorded a short webinar that explains the split dollar structure and details a case study of a split dollar plan utilizing life insurance. You may follow the link below to view it:

Watch our video explaining all the details of split dollar.

Jordan Pence
Post by Jordan Pence
August 5, 2022