The Flexibility of Split Dollar Life Insurance to Provide Tax Efficient Benefits and Tremendous Financial Leverage
Growing up in the Panama Canal Zone, we always wondered about how competitive Zonians might be with Stateside teams. We played all of the popular sports - football, baseball, basketball and track and field. During those "Wonder Years”, Panama had five world champion boxers and several Panamanians world champion Pittsburgh Pirates (Manny Sanguillen and Renny Stennet. Of course, Panama also had Rod Carew to offer, a Panamanian by way of New York City. Several Canal Zone kids made it to AAA in the Pirates organization.
Herb Raybourn, a longtime Zonian, the longtime Pirates and Yankee scout, is well known for signing Mariano Rivera. He also signed some Zonians during his time. Several made it to single A. One of my brother's classmates, Jaime Cocanower, pitched Baylor to the NCAA Championship and then pitched five years for the Milwaukee Brewers. We played in several American Legion tournaments with the disadvantage of playing teams coming off of an eighty-game season while we are playing our first few games of pre-season. In youth football we played an all-star team from Miami coached by a former Zonian, fared very well. One of my high school classmates, a white kid with flaming red hair ran the 100-yard dash in 9.4 on a cinder track. In high school my brother kicked a 44-year field goal and I kicked a 41-yard field goal in the pouring rain. Yours truly owned a 4.5 forty-yard dash. I played my last two years of high school at Culver Military Academy in Indiana and had the opportunity to play against the #3 team in the state and felt that the Zonians could have beaten this team every day of the week and twice on Sunday. But it was the Wonder Years, and we were always outside looking in!
At Culver I had the good fortune of sitting behind Jennifer Steinbrenner, the daughter of New York Yankee owner, George Steinbrenner, in Latin class. She was a top student and a nice person. It was the height of the Billy Martin saga. It surprised me in my research that Mickey Mantle is considered the greatest switch hitter in the history of major league baseball. The planning power and potential of Switch Dollar Life Insurance is also not well known or appreciated. This article shows how an endorsement or Collateral Assignment Non-Equity Split Dollar can be converted to a Loan Regime Method of Split Dollar™ without taxation.
The goal of a Split Dollar Arrangement is to provide a business owner or executive with a low-cost executive benefit. The cost can be considered in two ways, the premium out of pocket expense and the tax cost to the business owner. The business owner's tax cost is not measured by the amount of the premium paid by the employer but rather the value of the economic benefit of the death protection payable to the business owner's beneficiary.
In the economic benefit regime in either endorsement method or the collateral assignment method, the economic cost to the executive is measured by the lesser of the insured's annual renewable term cost or the Table 2001 cost. Life insurers typically maintain a low cost annual renewable term policy on the books for this purpose. The rate increases as the insured ages. Eventually, it reaches a point where the business executive says "ouch." In the meanwhile, the employer owns the policy cash value and a death benefit equal to the cash value.
Once you reach the point where the amount of the executive starts to feel the financial pain of the level of the economic benefit, it might be financially viable to use the Loan Regime Method of Split Dollar where the interest component remains the same rather than increase each year like the economic benefit regime because the cost of annual renewable term increases each year. Switch Dollar life insurance is the method of switching from the endorsement method or collateral assignment method to the loan regime method. With interest rates at a historic regime, this is a planning option that should be considered in every existing Split Dollar Arrangement or every new Split Dollar Arrangement being contemplated.
Switch Dollar life insurance allows the business owner to reposition the life insurance policy in a Split Dollar Arrangement to maximize the growth of the cash value for supplemental retirement income purposes. A business owner can enjoy the benefit of the economic benefit in the early years followed by a switch to the Loan Regime Method without taxation while locking in the current low interest rate of 1.12 percent in August 2020. The business owner will own all of the policy cash value in excess of the premiums plus accrued interest after the switch. The annual interest can be accrued. The LSD™ Rollout Method can be used to terminate or rollout out the employer's interest at a 65-95 percent discount. If you own a Split Dollar plan, this is the time to be a switch hitter.