Economic Benefit Q & A

Transcription

1 Economic Benefit Q & A Economic Benefit Calculations for the Current Tax Year Frequently Asked Questions APPROVED FOR ADVISOR AND CLIENT USE. Provided by Lincoln Financial Group (Lincoln), the marketing name for Lincoln National Affiliates are separately responsible for their own financial and contractual obligations. Lincoln is not in the position to render legal, accounting, or other professional advice. If legal or tax advice is required or questions arise, contact legal counsel or a professional tax advisor. IRS Circular 230 Disclosure: This material was prepared to support the promotion and marketing of a life insurance product. Neither The Lincoln National Life Insurance Company, its distributors nor their respective employees and representatives provide tax, accounting or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Clients should consult their own independent advisor as to any tax, accounting or legal statements made herein. Page 1 of 5

2 Economic Benefit Calculations for the Current Tax Year Frequently Asked Questions APPROVED FOR ADVISOR AND CLIENT USE. 1. Will there be a change in economic benefit reporting for the current tax year? No, there are no material changes. In general, you will receive information in a very similar format to last year. We have recently combined some of our policy administrative systems to further enhance our service capabilities. If you have policies on more than one of our admin systems, you may see differences in the communications. Due to rules handed down on split-dollar policies starting in 2001 and the final regulations issued in September 2003, it is not acceptable for Lincoln to provide the reportable economic benefit to clients and advisors. Lincoln will give all of the pertinent policy information to the policyholder, but a tax advisor will have to decide which pieces of information are appropriate to which agreement. When Lincoln receives a request for economic benefit calculations for a split-dollar policy, the policyowner will be sent a cover letter, worksheet and some additional information regarding calculations of economic benefit. The following is the cover letter that clients/advisors will see when information is disseminated. This letter is intended to provide important information regarding the life insurance policy noted above. We understand the policy is subject to a split-dollar arrangement. Taxation of a split-dollar plan can vary by the date the arrangement was entered into, the terms of the agreement, the insurance issuer, whether the insurance coverage is single-life or joint-life and whether the arrangement was materially modified since inception. For plans entered into before September 18, 2003, the IRS guidance found in Notice indicates that as long as the parties continue to treat and report the value of the life insurance protection as an economic benefit, the Service will not currently tax growth in policy cash value even if it exceeds the portion payable (for example) to the employer (so-called equity plans). So, for these plans, the economic benefit calculation depends, in part, simply on selecting the correct rate. The chart on the next page details possible rates based on when the plan was established and if the plan was materially modified. For plans entered into on or after September 18, 2003, based on the IRS guidance found in final regulations, there are two mutually exclusive approaches to the tax treatment of such plans. One is called the economic benefit regime and the second is the loan regime. The information enclosed assumes you have determined that your arrangement meets the criteria of the economic benefit regime. A split-dollar arrangement falling under the loan regime is subject to different taxation and will not be discussed in this letter or accompanying material. Lincoln is not privy to all of the information necessary to determine a final economic benefit. However, we have included in this letter the information available to us that you may need in order to help calculate the economic benefit for your spoilt-dollar arrangement, along with a worksheet. The information and calculations contained in this letter are provided for your convenience and are based on general split-dollar principles that may not apply to your specific case. Lincoln strives to provide accurate and authoritative information regarding the subject matter; however, Lincoln is not in a position to render legal, accounting, or other professional advice with respect to splitdollar arrangements. If uncertain of the rules, please contact your legal counsel or professional tax advisor for guidelines on the calculations. Page 2 of 5

3 2. Does this process apply to the economic benefit calculation for pension plans as well? No. The rules for pension plans are simpler and so you will notice only small changes in the reporting process for some pension policies. 3. Why won t Lincoln provide economic benefit costs for split-dollar plans? Lincoln could not have foreseen the significant changes in IRS regulation of split-dollar policies. These changes require a legal interpretation to documents something that neither Lincoln, nor its representatives are authorized to do. Lincoln fulfills our duties to policyowners, trustees, and advisors by providing all of the data to which we have access. Lincoln is not required to provide the economic benefit calculation. Your tax professional must make the final determination as to the economic benefit reporting due to the new rules surrounding these arrangements. 4. I can tell you that my policy was not materially modified. Will Lincoln prepare the costs? Again, Lincoln is providing all of the information in a format that will make it relatively simple for you determine the reportable economic benefit, once the advisor determines whether or not the arrangement has indeed been materially modified and he or she decides on the appropriate rate table to use. However, the tax advisor needs to make the final determination, using the policy information Lincoln provides and his or her knowledge of the additional regulations and the split-dollar arrangement. 5. What is the difference between economic benefit regime and loan regime for taxation for split dollar arrangements? Who can tell me which to apply to this policy? In general, the economic benefit regime applies to company-owned, endorsement split-dollar cases as well as non-equity, third-party owned (e.g., an irrevocable trust) collateral assignment arrangements. The loan regime applies to other collateral assignment plans. Details are found in the final regulations. Please see the IRS site for Notice Page 3 of 5

4 6. Why does the worksheet indicate that some company rates cannot be used? Notice gave additional guidance on what rate tables are appropriate to use under different circumstances. Lincoln is merely giving as much guidance as we can in pointing you in the right direction as to which tables may be appropriate. 7. Why did the tables change? The tables haven t changed, but the applicability of tables to certain arrangements has. For example, newer arrangements can only use Table 2001, whereas an earlier arrangement may be able to use company term rates, unless there was a material change to the policy. 8. Does this mean that values provided in previous years were incorrect? Values provided in previous years were produced in accordance with the rules in place at that time. 9. What are the criteria for using the different rate tables? Taxation of a split-dollar plan can vary by the date the arrangement was entered into, the terms of the agreement, the insurance issuer, whether the insurance coverage is single-life, or joint-life and whether the arrangement was materially modified since inception. Going forward, Legacy Jefferson-Pilot customers will be able to use Lincoln company rates, if their tax advisor deems company rates to be applicable to their situation. However, please note that no direct communications to our customers will include company rates. Rates will need to be pulled from the website (see Question #14) and you will need to use one of the provided worksheets to calculate your economic benefit cost. 10. What does it mean that a policy was materially modified? Who can tell me if a policy was materially modified? The term materially modified has not been defined by the IRS. Examples of changes that do not materially modify the plan include: change of premium mode, change in the beneficiary, change in loan interest rate, changes required to maintain the contract as life insurance under section 7702, or change of address. Lincoln is unable to make such a determination for any policy subject to a split-dollar arrangement. The tax advisor will need to make the determination. Page 4 of 5

5 11. I don t have a tax advisor. Is there a way that Lincoln can do this for me? No, we would advise you to immediately seek tax advice from a professional as a split-dollar agreement will need to be reviewed in light of the changes to IRS regulations. This advisor should then also be contracted to assist in determining the appropriate economic benefit calculation. 12. When will these values be available? Lincoln will use values as of December 31 and mail the information in mid-to-late January. 13. Can I get values prior to January? IRS regulations suggest that the reportable economic benefit should be calculated using values as of December 31. The valuation date is described as the last day of the non-owner s taxable year. Lincoln provides only the December values. If the values used are values other than the end of the year, we make no representation as to their applicability to your situation. If you still wish to calculate using pre 12/31 values, you can use the worksheets and rates on the website and call the appropriate customer service area for the current values. 14. Is there anywhere to go to get additional information? Yes. You can go to the Lincoln public website (or Look for Financial Products/Life Insurance/(scroll down to)economic Benefit Reporting. This site includes such things as the Government and Company rate tables, a copy of the letter and worksheet that can be used for tax year reporting, and some additional material. This site is available to customers and their financial and tax advisors. LCN: Page 5 of 5