Discussion:Life Insurance Policy Question
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Discussion Forum Index --> Tax Questions --> Life Insurance Policy Question
| 13 June 2006 | |
| I have a corporate client (s corp - I also prepare the Form 1040 for the sole shareholder) that pays premiums on a life insurance policy owned by the shareholder. The policy is set up under a 1991 agreement that amounts to a "collateral assignment system." This is where the corporation/employer makes annual loans to the employee of amounts equal to the yearly increases in the CSV of the policy. The employee then assigns the policy to the employer as collateral security for the loans, which are payable at the employee's death.
I have two questions concerneig this arrangement: 1.) Does this arrangement give rise to a taxable fringe benefit to the employee? Should the value, if any, of this benefit appear in Box 14 on the employee's Form W-2? 2.) How should the corporation treat the "loan" payments it is making? Should it carry an "Other Asset" on its Balance sheet for these funds? May it pay the actual premiums and deduct these costs? | |
| 15 June 2006 | |
| In the typical split-dollar collateral assignment arrangement, the employee is only taxed on any premiums paid by the employer that exceed the loan amount. In other words, the employee is only taxed on the amount that he is not expected to repay from the death benefit. See Reg §1.7872-15.
The corporation may not claim a deduction for any of these premiums since the corporation is a co-beneficiary of the policy, and Internal Revenue Code § 264 would apply. | |
| 15 June 2006 | |
| Generally you book the premium payments to a Cash Value-Life Insurance acct in Other Assets and adjust for actual CV at year end against AAA/Retained Earnings area. The employee is to pick up what's known as the PS58 cost on their returns, which is usually a 20 dollar bill of income. Seriously. | |
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