The split dollar concept is not hard to grasp. It is a funding agreement that helps an individual obtain life insurance at a lower cost than would otherwise be possible. This is achieved by splitting and sharing the premium with another entity or individual such as a small business. The agreement, provided in a written arrangement, generally calls for the pooling of premiums in exchange for the sharing of death benefits and is some cases the cash values

This split dollar insurance design is a versatile agreement that works well in any number of scenarios, not just generational transfers of assets.

This split dollar agreement can also be effective:

• As a select benefit to favor an employee or co-owner in a business, with the business helping these individuals obtain coverage to protect their families for a lower immediate outlay of cash to pay premiums.
• As a benefit for employees or owners who are rated (or perhaps significantly older) and might not otherwise be able to afford life insurance coverage unless at least a portion of the cost is paid by the business.
• As a funding tool for deferred compensation and salary continuation plans.
• As a funding vehicle for buy sell agreements, especially when there are large age discrepancies between the parties. (As with Little John and Big John, if the agreement calls for a younger, lower paid employee to purchase life insurance on an older business owner, the cost for the coverage could be significant — and perhaps prohibitive for the younger employee, if he or she had to pay the entire premium alone.)

We have seen how a split dollar agreement can help fund a buy sell agreement. Under

Above, we saw how a split-dollar arrangement can help fund a buy- sell agreement. Under another option, it can be used by an older employee or owner to obtain coverage to protect his or her family. Under this plan, the employee applies for and owns the policy and names his or her personal beneficiary. The business pays all or a portion of the premium. In return, a portion of the proceeds equal to that paid by the business in premiums is assigned to the business.

Tax Considerations
It is important to be aware of the potential taxable events of a split-dollar life insurance plan. In general, premiums are not deductible by either the employee or the employer. Any money "bonused" to the employee to help pay premiums will generally be treated as taxable income to the employee and as a deductible business expense by the business.

Proceeds are generally received without income tax by either the employer or the employee's beneficiaries (although the AMT  "alternative minimum tax" may apply if proceeds are payable to a corporation).

The "Economic Benefit" needs to be understood. Under federal tax law, any portion of the economic benefit of the coverage that is not paid by the employee is considered to be a form of compensation. This is calculated using the P.S. 58 tables or the insurance company's one-year term rate, whichever is lower. To avoid this, the amount the employee pays is often equal to the "economic benefit" of the protection received by the employee in that year.

The Bottom Line
Split-dollar insurance can be a valuable business planning tool that bridges the generation gap by enabling younger or lower-paid employees and family members to purchase coverage to achieve specific goals. It can benefit your company and favored employees including owner/employees and designated heirs. However, especially when factoring in the tax aspects, it is important to work with people who are knowledgeable.