The Income Taxation of Employment Split Dollar Loan Arrangements Split Dollar Loan Arrangements

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1 The Income Taxation of Employment Split Dollar Loan Arrangements Split Dollar Loan Arrangements These materials are not intended to be used to avoid tax penalties and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor. Neither ING nor its affiliated companies or representatives give tax advice. Clients should consult with their tax and legal advisors regarding their individual situation.

2 The Income Taxation of Employment Split Dollar Loan Arrangements The final split dollar regulations require premium payments on arrangements implemented or materially modified after September 17, 2003 to be taxed under either the economic benefit regime or under the loan regime. When the employee or a representative of the employee is the policy owner, the loan regime will be used to determine the taxation of the arrangement (unless the employer is entitled to recover the greater of the cash values or premiums it has paid in a non-equity collateral assignment arrangement). Because many premium payment agreements will qualify as split dollar loan arrangements, it is important to understand how they will be taxed. Four Questions to Consider The income tax rules pertaining to split dollar loans are complex. Different split dollar loan arrangements have different income tax consequences. It may be possible to determine how a particular split dollar loan arrangement should be taxed from the answers to four questions: n When will the loan be repaid? n Is the loan s interest rate lower than the market interest rate? n How will the loan interest be paid each year? n How will the loan be repaid? Question One: When Will the Loan Be Repaid? Split dollar loans are either payable at a specific time or upon the employer s demand. If a repayment date is specified in the note, the loan will be treated as a term loan (provided the employer does not have the right to demand repayment before the term ends). Term loans fall into three categories: n Short term (lasting not more than three years) n Medium term (lasting more than three years, but not more than nine years) n Long term (lasting more than nine years) If a loan does not have a specific repayment date, but by its terms does not have to be repaid until the insured s death, it is treated as a term loan. Its duration is determined by the insured s life expectancy on the date the note is executed. All other split dollar loans that do not have a specific repayment date are treated as demand loans. 1

3 Question Two: Is the Loan Interest Rate Lower Than the Market Interest Rate for Loans of Similar Length? Congress has given the IRS power to set fair market interest rates for different types of loans. When the loan interest rate is at or above the market rate, there are no income tax consequences. But, when the interest rate on a loan is less than the fair market rate, then income taxes on the loan interest are due as prescribed in IRC Section The IRS sets the fair market rate monthly. This published rate is known as the applicable federal interest rate (AFR). Whether the interest rate for a term loan is at or below market is determined by comparing the interest rate in the note with that month s AFR for loans of similar duration. Short-term, mid-term and longterm loans have different AFRs. If the interest rate stated in the note is less than the AFR, then the loan is below market and income taxes under IRS Code Section 7872 are triggered. Demand loans are different. The short-term AFR can be used as the fair market rate. However, because that rate can change monthly, the calculation of interest would result in a month-by-month calculation, with monthly compounding of accrued interest. To simplify calculations of interest for demand loans, IRC Section 7872 allows the use of a blended annual rate for demand loans with a fixed principal amount outstanding for an entire calendar year. Under Revenue Ruling (1 CB 377), the blended annual rate is the product of (a) one half of the January semi-annual short-term AFR times (b) one half of the July semi-annual short-term AFR. The IRS publishes this blended annual rate every July based on the relevant rates for January and July that year. Whether a demand loan is at or below market is determined by comparing the interest rate in the note with this rate. Because the market interest rate for a demand loan changes yearly, a demand loan with a fixed interest rate can be at or above market in some years and below market in other years. A possible way to avoid this problem is for the demand loan to have an interest rate that floats from year to year with the blended annual rate. Question Three: How Will the Loan Interest be Paid Each Year? The annual income tax consequences of a split dollar loan transaction (either a term or demand loan) also depend on how much interest the employee actually paid during the year. The employee s actual interest payment is compared with the amount of interest that should have been paid under the terms of the note. If the employee s interest payment was less than that required by the note, then the employee will be treated as having taxable income in the amount of this difference. In a term loan it may be possible to prevent this difference from being treated as taxable income if the unpaid interest is added to the principal of the loan. This is called accruing the unpaid interest. Example Joan has a $100,000 term loan with ABC, Inc. The note requires Joan to make a 3% annual interest payment to ABC. The fair market interest payment was $3,000 but Joan paid only $2,000. Thus, she has taxable income of $1,000 (the difference between the interest she should have paid and the interest she actually paid). This taxable income could be negated if Joan and ABC agree to add the $1,000 in unpaid interest to the $100,000 loan balance. If this happens, the loan principal will grow to $101,000. 2

4 Question Four: How Will the Loan Be Repaid? Part of planning for a split dollar loan arrangement is to determine how it should end. Planning for how the debt to the business will be handled is very important. As was the case with equity split dollar arrangements prior to Notice and the final regulations, the most attractive way for the employee to end (roll out) a loan arrangement is for the business to release the employee s obligation to repay the loans in a pre-arranged bonus. Unfortunately, the final regulations appear to impose negative tax consequences if the employee s obligation to repay the outstanding loans is released or forgiven. They take the position that for the loan arrangement to be bona fide, the parties must at all times intend that the loan will be repaid. If the business releases the employee from the repayment, then depending on how the arrangement is viewed, the policy s cash value equity could be taxed as ordinary income or the amount of the forgiven loan could be treated as taxable compensation to the employee. Then the loan arrangement would not accomplish its goal of building income tax free supplemental income for the employee. Fortunately, there are other reasonable alternatives for rolling out of a split dollar loan arrangement: n Using part of the policy s death benefits to repay the loan n Withdrawing/borrowing policy cash values to repay the loan n Using some of the employee s other assets to repay the loan n Distributing a dividend to the employee that could be used to repay the loan n Using other taxable compensation from the business to repay the loan n A combination of two or more of these alternatives The first three alternatives are possible, but may have potential drawbacks. If the loan arrangement stays in place until death, the key employee will be responsible for not only non-deductible interest payments annually until death, but also income taxes on any imputed interest. This cost could reduce the arrangement s ability to produce discretionary retirement income. Depending on the type and length of the loans, the interest costs could increase if interest rates in the market place rise. Using policy cash values to repay the loans could substantially reduce the value of the policy and its ability to produce supplemental retirement income and could cause the policy to lapse. And using some of the key employee s other assets to repay the loans could be problematic if the key employee does not have enough other assets to repay the loan or may wish not to use them for this purpose. 3

5 The Dividend Rollout The Jobs Growth Tax Relief and Reconciliation Act of 2003 (JGTRRA) may create a limited opportunity to repay some of the split dollar loans from the business. JGTRRA reduced the income tax on qualifying dividends paid to shareholders to a maximum federal income tax rate of 15 percent until December 31, Thus, if the business is a corporation and the employee is a shareholder, it may make sense for the business to distribute a dividend to the owner/employee (and all other shareholders of that class of stock in the business). The owner/employee could pay income taxes from the dividend and use the remaining cash to repay or pay down the outstanding loan balance. In many instances, the loan arrangement will require premium payments beyond Thus, premiums after that year may be paid through new demand or term notes or 162 bonuses. A dividend strategy will not be appropriate in every case. It is only a potential solution for split dollar loans made prior to After that, the 15 percent maximum rate changes back to ordinary income rates. It should only be considered in these conditions: n The business is a corporation (only corporations can pay dividends) n The loan arrangement is between the corporation and an owner (dividends can only be paid to owners) n The owner has a substantial percentage of a class of stock (dividends generally have to be paid pro rata to all owners of the class of stock that will receive dividends; all owners of that class of stock will be entitled to receive dividends that are declared) Other Compensation Repaying the split dollar loans by using other taxable compensation from the business is possible, but needs to be carefully considered. If there is an enforceable agreement that business funds will be used to repay the loan balance, the IRS could disregard the entire loan arrangement. If this occurs, the policy s cash value equity could then be taxed as ordinary income or the amount of the forgiven loans could be treated as taxable compensation to the employee. This would undo the benefit of tax deferred cash value growth that the loan arrangement was designed to deliver. Thus, it is imperative that the loan repayment and other compensation to the employee not be contractually connected. There are two potential alternatives to consider for rolling out of a loan arrangement with other compensation: n The Loan/SERP Rollout (ING s LEAD plan) n The SERP/Loan Rollout (ING s LIFE plan) 4

6 The Loan/SERP Rollout (The LEAD Plan) In the years following the beginning of the split dollar loan arrangement, the business could give the employee a second selective benefit: the opportunity to participate in an unfunded defined benefit Supplemental Executive Retirement Plan (SERP) that would vest at a specified age. If the employee remained productive and stayed with the business until that age, the business would pay a supplemental benefit (a fixed amount) for a specific number of years (i.e. $40,000 per year for 10 years). The business would not pre-fund the benefit. If the employee satisfies the criteria set forth in the SERP plan, he or she would receive the payments (assuming a source of available funds). The employee could (but would be under no obligation to) use all or part of the SERP benefits to repay the loan balance. Working together the cash flows from the SERP benefit and the loan repayment could partially offset each other. For example, if the total loans to be repaid are $500,000, SERP benefits of $40,000 per year for 10 years or $80,000 for 5 years could help pay off a large portion of the loan balance. The SERP payments would be taxable to the employee and deductible to the business (so long as total compensation is reasonable). The employee could recycle some or all of the SERP payment back to the business as a repayment. Since the SERP benefit is taxable to the employee, he or she could make withdrawals from the policy (if the collateral assignment permits withdrawals) to pay the income taxes. ING calls this series of events the Loan Equity Accumulation Design (LEAD plan). The SERP benefit should not negatively impact the loan arrangement. The SERP benefits are not vested until the stated age, so the employee has no certainty they will be available. The SERP agreement does not require the employee to use the payments to repay the loans. The employee can do whatever he or she wishes with them and they are at risk for claims from creditors and divorce. The loans should be considered bona fide if they are actually repaid and there is no link with other fully taxed corporate compensation. 5

7 The SERP/Loan Rollout (The LIFE Plan) There is another way in which a SERP benefit may assist an employee in rolling out of a split dollar loan arrangement. Suppose the business and the employee implement a SERP benefit, i.e. the employee will be entitled to receive $50,000 per year for 10 years upon reaching age 65. The business purchases a life insurance policy on the employee and pays premiums to fund its obligation. Prior to the time the policy s cash values begin to exceed the premium payments, the business lends the employee enough money to purchase the policy for its fair market value. A note is executed (a term note or a demand note) and the policy is assigned as security for repayment. Future premiums can be paid as Section 162 bonuses or as new loans and the employee pays income taxes accordingly over time. Policy cash values may grow to exceed loan amounts from the business and to the extent they do, the excess amounts belong to the employee. Assuming the employee eventually satisfies the conditions to receive the SERP benefits, he or she will receive those benefits and income taxes on them can be paid from policy withdrawals or loans. When the loans are retired, the employee can use the policy as necessary for supplemental retirement benefits that can potentially be income tax free. ING calls this strategy the Life Insurance Financial Equity (LIFE) plan. The SERP/Loan (LIFE plan) approach may be more conservative from a tax point of view than the Loan/SERP (LEAD plan) approach. That s because in the SERP/Loan (LIFE plan) approach the SERP is the first benefit. As a result, its relationship to the split dollar loan arrangement is more attenuated because the loan arrangement wasn t created until years later. In fact, there is no certainty that the loan arrangement will ever come into existence. In the SERP the business does not make a contractual commitment to allow the employee to purchase the policy or agree in advance to lend the money to fund the purchase. The business keeps its options open and there is no reason to discuss adding a loan arrangement as a benefit for the employee until policy cash values begin to approach the total amount of premium paid. The SERP/Loan approach also has another potential benefit: because there are no loans in the early years, there are no interest costs to worry about. Interest only becomes an issue after the business lends the employee the money to purchase the policy. The SERP/Loan may be the simpler and less costly of the two. If a SERP is used in some way in conjunction with a loan arrangement, an IRS challenge is less likely to be upheld when: 1. The arrangements are entered into at different times 2. The payments from the business in each arrangement are different 6

8 Documenting Loan Arrangements Every split dollar loan transaction should be in writing and a copy should be kept in the business legal and financial records. Four legal documents may be required: n The agreement for a loan is a document called a note. A note is the contract between the employee (borrower) and the business (lender) promising to lend a specific sum of money at a specified interest rate for a stated period of time. n If a corporation is involved, a resolution authorizing the Treasurer to disburse the loan proceeds to the employee (borrower) is also needed. n If the life insurance policy is to serve as security for repayment of the loan, a collateral assignment from the employee to the business should be filed with the insurer. n A notice and consent to the coverage from the business to the employee which complies with the Pension Protection Act of The employee should sign the form before the policy is purchased. Demand Loans in Detail The primary advantage of a demand loan is that the fair market interest rate at any given time is usually less than the fair market interest rate for a mid-term or long-term loan. The primary disadvantages of a demand loan are: 1. The employer may demand repayment at any time. 2. The market interest rate changes from year to year. Market Rate Demand Loans When a note contains an interest rate that is at or above the fair market rate, the employee does not recognize any taxable income, provided he or she makes the interest payment required in the note. However, if the employee s interest payment is less than that required under the terms of the note, then the employee recognizes taxable income on the difference. A note can be designed to be at or above the IRS fair market rate in either one of two ways: 1. The note can state that the interest rate is a variable rate that floats so each year it is equal to the IRS blended rate. 2. It can specify a rate identical to the IRS blended rate in the year it is executed. The first alternative is usually preferred. That s because a specific rate can be at or above market at the time the loan is entered into, but the stated rate can become a below market rate in future years if the IRS blended interest rate increases. For this reason the first approach is used more often. 7

9 Below Market Demand Loan When the terms of a demand loan permit the employee to pay less than the market rate of interest, the IRS will tax the loan arrangement under the rules of IRC Section These rules have different implications for the employer and the employee. IRC Section 7872 re-characterizes a below market loan as an arm s length transaction between the employer and the employee. The lender (employer) is deemed to make a payment to the borrower (employee) in an amount equal to the difference between the stated interest rate and the AFR. The AFR used for this calculation is the blended rate for the current year. This imputed payment is treated as taxable compensation to the employee. The borrower (employee) is then deemed to have paid interest to the lender in the same amount. This re-characterization results in no net taxable income for the employer. That s because the income from the employee s deemed interest payment is offset by a deduction for the interest that the employer is deemed to pay to the employee as compensation. Unfortunately, the employee is not as lucky. The employer s deemed interest payment is taxable to the employee as compensation, but the employee s deemed interest payment back to the employer cannot be deducted. That s because the employee s interest payment is treated as personal interest and personal interest payments are not deductible. Thus, the employee must report the employer s deemed compensation payment as taxable income. Below is an illustration showing the flow of money between the lender (employer) and the borrower (employee). Deductible Compensation Taxable Employer (Lender) Employee (Borrower) Taxable Interest Non-Deductible 8

10 Example Joe Smith and ABC, Inc. enter into a split dollar demand loan arrangement. ABC lends Joe $10,000 per year to pay the premiums on a life insurance policy on his life. The parties agree that Joe will not pay any interest on the loan balance (an interest-free loan). The policy is subject to a collateral assignment to assure repayment of the loans. For the first year the appropriate AFR is 5%. ABC is deemed to give Joe $500 in taxable compensation for not having to pay any interest. It is also deemed to have received a $500 interest payment from Joe. For ABC, the deduction it takes for the compensation payment offsets the taxable phantom interest payment it is deemed to receive from Joe. It has no net taxable income because the $500 compensation deduction cancels out the $500 of income from Joe s deemed interest payment. Joe, on the other hand, has $500 in taxable compensation that cannot be offset because the $500 interest payment he is deemed to have made is not deductible because it s treated as personal interest. Joe has $500 of taxable income in the first year. In the second year ABC makes a new $10,000 loan to Joe and the IRS blended rate is now 6%. The demand loan is now $20,000. ABC has $1,200 in income and deductions which offset each other. Joe has $1,200 in taxable income. Each new premium loan is added to the total demand loan balance; the demand loan continues until it is repaid or released. Term Loans In Detail The primary benefit of a term loan is certainty. As long as the employee (borrower) complies with the terms of the loan, he or she has the certainty that the loan will not have to be repaid until the specified date. He or she also has the certainty that the stated interest rate cannot be changed without his or her consent. That rate and repayment date are locked in for the life of the loan. If the term loan is a mid-term or long-term loan, the market interest rate will be higher than the market interest rate for a demand loan. Market Term Loan The rate stated in the note should be compared with the published AFR in the month the note was executed. If the interest rate on a term note equals or exceeds the published AFR for the loan and the employee actually pays all the interest due, then the employee has no taxable income to report. Below Market Term Loan If a term loan note has an interest rate that is lower than the market rate, the employee will be forced to recognize taxable income. The taxation of a below market term loan differs significantly from that of a below market demand loan. In a below market demand loan the employee is taxed every year on the difference between the interest due under the note and the interest due under the IRS blended AFR. In a below market term loan, the employee s taxable income is accelerated and reported in the year the note is executed. The taxable income is the difference between the loan amount and the present value of the payments due under the note. This amount is treated as original issue discount (OID). If the employer makes additional term loans in future years to help the employee pay premiums, the new loans are not pooled or consolidated for tax purposes. Instead, each term loan is treated as a separate loan and is administered on its own. If future term loans are also below market, additional taxable income will be triggered. Below market term loans will have more immediate income tax impact on the employee than below market demand loans. In a term loan the taxable income is accelerated into the first year of the loan; in a demand loan the income tax impact is spread out over the life of the loan. It s as though the income tax is more front-end loaded in a below market term loan than in a below market demand loan. 9

11 Split Dollar Loan Arrangements Are a Series of Loans The premiums for most life insurance policies are paid in installments rather than lump sums. When business dollars are used to pay these premiums through loans, each premium payment constitutes a new loan. Thus, each time a new premium is due, the employer and employee have to determine if the new loan should be a demand loan or a term loan. While each demand loan is distinct structurally, a new demand loan can be added to previous demand loans to make a single pool for accounting purposes. In other words, all demand loans can be combined and accounted for as a single sum. They can even be renegotiated into term loans at any time. Term loans, however, can only be converted into demand loans at the end of the term. They cannot be pooled for administrative purposes. Each term loan stands on its own and must be properly handled until its term ends. Then it can be paid off, renegotiated into a new term loan, renegotiated into a new demand loan, or released to the employee as a taxable bonus. Example Jane Jones and ABC, Inc. decide to implement a life insurance loan arrangement. ABC will make annual $20,000 loans to Jane over a ten year period. At the end of ten years Jane will owe $200,000. Because the type and interest rate of each loan is determined in the year in which it is made, some of the loans were demand loans and others were term loans. The demand loans are pooled together. At the end of the tenth year, there are five loans outstanding: one $20,000 long-term loan at 5% interest (year #1), three $20,000 mid-term loans at 3%, 3.3% and 3.5% interest (years 2, 3 and 4) and a $120,000 demand loan at 1% interest. #1 Term - 5% #2 Term - 3% #3 Term - 3.3% #4 Term - 3.5% Demand Loan Pool $120,000 #5 Demand #6 Demand #7 Demand #8 Demand #9 Demand #10 Demand Taxable 10

12 Design Decisions That May Add Value for the Employee Selective benefits are purposely created to reward a key employee for his or her dedication and contribution to the business overall performance. The business and the employee may be able to structure the arrangement to provide more value to the employee. Here are several ideas that may make a split dollar loan arrangement even more attractive to a key employee: 1. Start as an Economic Benefit Split Dollar Benefit A split dollar loan arrangement benefits an employee in three stages: n The death benefit stage n The accumulation stage n Distribution stage In the death benefit stage, the employee names a beneficiary to receive any death benefits in excess of the loan balance to be repaid to the business. The cost to the employee is the interest on the loan (or the income tax on imputed interest if it is a below market loan). Depending on the age of the employee, it may be possible to reduce this out of pocket cost. An attractive alternative may be for the arrangement to begin under the economic benefit regime rather than the loan regime. The advantage to the economic benefit regime is that cost to the employee is based on the economic benefit value of the death benefit (determined under IRS Table 2001). There are two potential advantages to the employee in starting as an economic benefit split dollar benefit: 1. The taxable value of the economic benefit may be less than the cost of the interest on the loan (or the income tax on the imputed value of a below market demand loan). The potential savings depends on the age of the employee, the amount of loan balance, and the death benefits provided by the policy. 2. The second advantage is that interest rate volatility has no impact on the employee while the arrangement is structured as a split dollar benefit under the economic benefit regime. Interest rate risk is postponed by structuring the death benefit stage under the economic benefit regime. 11

13 There is also an advantage to the business. When the benefit starts as an economic benefit split dollar benefit, the business may have more control over the policy. To implement this strategy, the benefit would begin with the life insurance policy owned either by the business as an endorsement split dollar arrangement or by the employee as a non-equity collateral assignment arrangement. At some time prior to the point at which policy cash values begin to exceed the total loans from the business, the parties would agree to convert to a loan arrangement. That s when the arrangement transitions from the death benefit stage to the accumulation stage. The split dollar portion would end and taxation would be based on the loan regime under IRC Section If an endorsement split dollar arrangement was in place, the policy would have to be transferred to the employee and a note would be executed for the total of the premiums paid to date. Also, a collateral assignment of the policy should be executed and filed with the insurer to protect the business interests. If a collateral assignment arrangement was in place, there would be no need to transfer the policy. 2. Structure the Loans as Interest-Free Loans The note can be drafted so the employee is not required to make any interest payments. This is known as an interest-free loan. Interest-free loans often work well with demand loans, but can be problematic in term loans because of original issue discount (OID). Interest-Free Demand Loans As with any below market demand loan, an interest-free demand loan triggers taxable income to the employee each year the loan is outstanding. If the loan balance is $20,000 and the IRS blended rate is 2.85% and if the employee does not pay interest, $570 in imputed interest income will be taxed to him or her. Paying the tax on the $570 is cheaper than paying the $570. Interest-Free Term Loans Interest-free term loans are less attractive than interest-free demand loans. Below market term loans (including interest-free loans) accelerate all the income tax consequences to the first year of the loan. Most experts advise against structuring term loans so they have below market interest rates. 12

14 3. Carefully Assist With The Interest Costs The business should not give the employee a bonus that is directly related to the interest costs of a split dollar loan arrangement. The final split dollar regulations make it clear that the loan arrangement will not be considered bona fide if the business is paying the interest for the employee. However, the final regulations do not say that a business can t give an employee a year-end bonus based on his or her overall performance. Most key employees are paid year-end compensation bonuses. These bonuses vary from year to year depending on the employee s performance and the financial condition of the business. This is common business practice. When the employee is actually going to make interest payments, using part of the overall bonus to make the interest payment can be an attractive option. For example, suppose the employee has an interest payment due of $1,000. If the business gives him a $10,000 bonus and he uses $1,000 to pay the interest, then the employee does not have to use personal savings or liquidate other assets to pay the interest. Instead, he will have less of the after-tax value of the bonus to use to meet other personal needs. Of course, there should be no contractual link between any loan or interest payment and the year-end bonus. If there is a direct link, the IRS may decide not to treat the split dollar loans as bona fide. It may treat the policy s cash value equity as ordinary income. Term Loans Using part of the overall bonus to pay interest costs may be more useful in term loan situations than in demand loan situations. Because term loans are seldom structured as below market loans (because of the accelerated tax on income), the employee will probably pay the annual interest due. A bonus strategy gives the employee the funds to pay the interest at a reduced net cost. Interest-Free Demand Loans If the loan is an interest-free demand loan, using part of the overall bonus to pay the interest costs isn t an option. The interest doesn t need to be paid or accrued in an interest-free demand loan because no interest payment is due. Instead the interest is imputed. The employee s cost is the income tax on the imputed interest. 13

15 Conclusion Split dollar loan arrangements between employers and employees can be very effective in helping employees purchase life insurance to meet their retirement and estate planning goals. A demand loan structure can help employees take advantage of lower interest rates for a period of time. However, these employees will need to be comfortable with volatility in interest rates and recognize that that they may rise substantially over time. Employees who want their arrangements to have predictable costs and results may choose a term loan structure that has stability but higher interest costs. Both split dollar loan arrangement structures will allow employees to use business dollars to pay life insurance premiums to enhance their financial security. Want to Hear More? For top-notch sales support from leading industry professionals dedicated to helping you grow your life business, call the ING National Sales Support Team at: 866.ING.SELL ( ) Split dollar arrangements, including split dollar loans, are subject to IRS Notice and final regulations that apply for purposes of federal income, employment and gift taxes. Clients should consult with their attorney before purchasing a life insurance policy that will be corporate/business owned or used in a split dollar arrangement to determine what restrictions may apply. This information is not intended to be tax advice. Remind clients to consult their tax advisors for more information regarding the tax implications of a loan arrangement. 14

16 ReliaStar Life Insurance Company 20 Washington Avenue South Minneapolis, MN ReliaStar Life Insurance Company of New York 1000 Woodbury Road, Suite 208 Woodbury, NY Security Life of Denver Insurance Company 1290 Broadway Denver, CO Neither ING nor its affiliated companies or its representatives give tax or legal advice. The strategies suggested may not be suitable for everyone, and each individual should consult with his or her own tax advisor and legal counsel before implementing any of the strategies discussed here. Life Insurance products are issued by ReliaStar Life Insurance Company, ReliaStar Life Insurance Company of New York, and Security Life of Denver Insurance Company. All are members of the ING family of companies. Only ReliaStar Life Insurance Company of New York is admitted, and its products issued, within the state of New York. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor cn ING North America Insurance Corporation 11/20/2006