Split-dollar: proposals would change rules for split-dollar life insurance.

• Author: Josephs, Stuart R.
• Position: Federal Tax

The IRS has proposed regulations for split-dollar life insurance arrangements. Once final, the new regulations would apply to any SDLI arrangement entered into after the final regulations are published in the Federal Register.

Also, an arrangement entered into on or before the final regulations are published that is subsequently materially modified is treated as a new arrangement entered into on the modification date.

Notice 2002-8 contains guidance for arrangements entered into before these regulations are effective. However, taxpayers may rely on the proposed regulations for treating SDLI arrangements entered into on or before the final regulations are published if all parties treat it consistently.

Overview of Proposals

These proposals provide guidance on the taxation of SDLI arrangements, including equity SDLI arrangements, for federal income, employment and gift tax purposes. Therefore, they apply to a SDLI arrangement between:

* An employer and employee;

* A corporation and shareholder; and

* A donor and donee.

SDLI Arrangement Defined--Under these proposals, an SDLI arrangement is defined, generally, as any arrangement that is not part of a group term life insurance plan described in IRC Sec. 79 between a life insurance contract's owner and a non-owner in which either party pays all or some of the premiums and is entitled to recover, conditionally or unconditionally, all or some of those premiums--and such recovery is to be made from, or is secured by, the contract's proceeds.

This definition is intended to apply broadly and, for example, will cover an arrangement under which a contract's non-owner provides funds directly to the owner with which the owner pays premiums--as long as the non-owner is entitled to recover, conditionally or unconditionally, all or some of the contract's proceeds (e.g., death benefits) or has an interest in the contract to secure the right of recovery. In addition, the amount to be recovered by the party paying the premiums need not be determined by reference to the amount of those premiums.

Under a special rule, an SDLI arrangement is any arrangement between a life insurance contract's owner and non-owner in which the employer or service recipient pays, directly or indirectly, all or some of the premiums, and the beneficiary of all or some of the death benefit is designated by the employee or service provider--or is any person whom they would reasonably be expected to name as beneficiary. This special rule...