PRIVATE NON-EQUITY SPLIT DOLLAR INSURANCE AGREEMENT [For a Single Life Policy]

Transcription

1 PRIVATE NON-EQUITY SPLIT DOLLAR INSURANCE AGREEMENT [For a Single Life Policy] Form A Designed to meet split dollar definition in regulations Two alternatives: secured by, or to be made from Sample for the use of legal counsel only Background Information: This split-dollar agreement is between an insured and the insured s irrevocable grantor trust. This agreement is intended to meet the definition of a split-dollar life insurance arrangement under Treas. Reg (b). This agreement contains two optional versions: a secured version and an unsecured version. Drafting attorneys will have to weigh certain issues when determining which to use: The secured version provides the insured a collateral assignment, and intends to meet the secured by definition of split dollar under Treas. Reg (b)(1)(ii). To avoid estate inclusion, however, the collateral assignment is limited, following the rationale of several nonprecedential rulings that have determined that a limited collateral assignment does not give rise to an incident of ownership under 2042(2). See Priv. Ltr. Ruls , , , , , and FSA The unsecured version gives the insured no collateral assignment, but intends to meet the definition of split dollar under Treas. Reg (b)(1)(ii) by providing that the insured s premium recovery is to be made from the proceeds, either by stating so explicitly, or by stating that the agreement is to be operated in accordance with Treas. Reg Because it is unsecured, some attorneys might view it as more safely avoiding any incidents of ownership. It is not clear, however, whether an arrangement creates an incident of ownership simply by providing that an insured s premium recovery is to be made from the policy s proceeds. So that this agreement is taxed under the economic benefit rules of the split dollar regulations, the trust is required to pay to the insured an amount equal to the policy s fair market value if the agreement is terminated during the insured s life, and at all times the only benefit provided to the trust is current life insurance protection that is, it is non-equity meaning the trust cannot access the policy s cash values. To better ensure that the insured does not have any incidents of ownership, in both versions, the parties anticipate that the trust will have sufficient assets independent of the policy to pay the insured his or her recovery amount upon a lifetime termination. Note to drafting attorneys: For a discussion of the issues involving private non-equity split dollar plans, see Advanced Planning Bulletin Private Non-Equity Split Dollar Its Potential Catch-22 And How To Avoid It, July This sample document is intended only as guidance for the client's own legal counsel. The document is general in nature and does not reflect the specific circumstances of any individual or situation. The document does not constitute tax or legal advice and cannot be used to avoid any penalties that may be imposed on a taxpayer. It is intended that the client's legal counsel will modify the document where necessary to satisfy the client's objectives and the requirements of any applicable federal, state or local law. Northwestern Mutual does not guarantee the effectiveness of this document and is not responsible for any tax or legal consequences resulting from use. Source: Private Non-Equity Split Dollar Insurance Agreement [For a Single Life Policy] Form A 2007 The Northwestern Mutual Life Insurance Company, Milwaukee, WI except that client s legal counsel is authorized to use, amend and modify this document in his own practice.

2 PRIVATE NON-EQUITY SPLIT DOLLAR INSURANCE AGREEMENT [For a Single Life Policy] Form A Designed to meet split dollar definition in regulations Two alternatives: secured by, or to be made from Sample for the use of legal counsel only THIS AGREEMENT is between ( Premium Payer ) and [Name of Trustee, and Name and Date of Trust] ( Trust ): DEFINITIONS: A. At-Death Recovery Amount : the amount equal to the total of Premium Payer s premium payments under section I. COMMENT: For the secured version, use paragraph A, above. For the unsecured version, practitioners may want to amend paragraph A to add language in order to meet the to be made from definition of split dollar. One option is to change paragraph A so it reads as follows: At-Death Recovery Amount : the amount equal to the total of Premium Payer s premium payments under Section I, and considered to be made from the policy proceeds solely for purposes of Treas. Reg (b)(1)(ii). Other practitioners might prefer to leave paragraph A as it is, and take the position that the to be made from requirement is implicitly satisfied by the Operation of Agreement paragraph in section V because it states that this agreement is to be operated in accordance with Treas. Reg For both versions, because the definition of split dollar in Treas. Reg (b) requires only that the premium payer recover all or any portion of his or her premium payments, the parties could agree that the At- Death Recovery Amount be some amount that is lower than cumulative premiums, and amend the above paragraph A accordingly. B. Insured :. C. Insurer : The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin. D. Lifetime Recovery Amount : The amount equal to the Policy s fair market value for gift tax purposes under Treasury Regulation (a). The Lifetime Recovery Amount shall be paid by Trust from assets other than Policy cash values. COMMENT: Treas. Reg (g) provides that the insured will be treated as making a gift to the trust (in addition to current life insurance protection) if the trust owes to the insured an amount lower than the policy s fair market value, and also provides that such value is determined under gift tax Treas. Reg (a). E. Policy : The policy of insurance on the life of Insured that is issued by Insurer and listed on Exhibit A annexed hereto, together with any supplementary contracts issued by Insurer in conjunction therewith. 2

3 F. Recovery Amount : The amount Trust must pay Premium Payer upon termination of this arrangement. RECITALS: A. Premium Payer and Trust intend that this arrangement meet the definition of a splitdollar life insurance arrangement under Treasury Regulations , and that it be taxed under the economic benefit regime of those regulations. B. Trust is the actual owner of Policy, and Premium Payer is willing to assist Trust in the payment of premiums on Policy. In exchange for this premium assistance, Trust is willing to pay to Premium Payer the Recovery Amount due under this arrangement. C. Although Trust is the actual owner of the Policy, Premium Payer and Trust intend that the special ownership rule of Treas. Reg (c)(1)(ii)(A)(2) apply, so that Premium Payer is treated as the owner of Policy for purposes of that rule. D. Premium Payer and Trust further intend that Premium Payer shall not have any incidents of ownership in Policy for purposes of 2042(2). THEREFORE, for value received, it is agreed: I. PREMIUM PAYMENTS. COMMENT: This section I provides alternate variations for the premium payments: Variation 1 is a contributory premium split, and Variation 2 is non-contributory (insured pays all). Under both, the cost of insurance is generally measured by Table 2001 or the insurer s lower one-year term rate (see Treas. Reg (d)(3)), Notice , Notice , and Rev. Rul ). If Trust pays no premiums, the cost of insurance is generally a gift from Insured to Trust. If Trust pays premiums under a contributory plan, it should not be income taxable to Insured if Trust is a grantor trust under 671. [Variation 1 Contributory] A. Each annual premium on Policy shall be paid as follows: 1. Trust shall pay a portion of each premium equal to the cost of the current life insurance protection. The cost of the current life insurance protection shall equal the amount of current life insurance provided to Trust, multiplied by the lowest life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin. The amount of current life insurance provided to Trust shall equal the excess of the total death benefit of Policy over Premium Payer s At- Death Recovery Amount. 2. Premium Payer shall pay all premium amounts not paid by Trust. B. Trust s premium share and Premium Payer s premium share shall be remitted to Insurer before expiration of the grace period on Policy. 3

4 C. Dividends on Policy shall only be applied to purchase paid-up additions and Trust shall not change the dividend option. [Variation 2 Non-Contributory] A. Each annual premium on Policy shall be paid by Premium Payer. B. Premium Payer s premium payment shall be remitted to Insurer before expiration of the grace period on Policy. C. Dividends on the Policy shall only be applied to purchase paid-up additions and Trust shall not change the dividend option. II. RIGHTS AND OBLIGATIONS OF PARTIES. A. In exchange for Premium Payer s payment of its premium contributions under Section I, Trust agrees to pay the Recovery Amount to Premium Payer upon this Agreement s termination. 1. If this Agreement terminates during Insured s lifetime, Trust agrees to pay to Premium Payer the Lifetime Recovery Amount. 2. If this Agreement terminates due to the Insured s death, Trust agrees to pay to Premium Payer the At-Death Recovery Amount. B. Trust shall be the sole and exclusive owner of Policy, subject to the following so that this Agreement is taxed under Treas. Reg : 1. Trust shall, at all times, be provided only the economic benefit of current life insurance protection as described in Treas. Reg (d)(3), so that the special ownership rule under Treas. Reg (c)(1)(ii)(A)(2) applies. 2. Trust shall not have or exercise any policy rights that can create any current access to Policy s cash value as described under Treas. Reg (d)(4)(ii), including but not limited to the right to borrow from or surrender Policy. 3. Trust shall not have or exercise any economic benefits described in Treas. Reg (d)(2)(ii) or (iii). COMMENT: If using the secured version, include subparagraph 4 and paragraph C, below. If instead using the unsecured version, skip over these paragraphs to the next comment. 4. As security for the Trust s obligation to pay the Recovery Amount to Premium Payer, Trust shall execute and deliver to the Insurer a Limited Collateral Assignment in substantially the form annexed hereto as Exhibit B. C. Neither this Agreement nor the Limited Collateral Assignment attached as Exhibit B shall create or confer upon Insured any incidents of ownership in Policy under 2042(2). COMMENT: If using the unsecured version, delete subparagraph 4 and paragraph C, above, and insert the following version of paragraph C, below. Also, do not attach the limited collateral assignment as an Exhibit. 4

5 C. This Agreement shall not create or confer upon Insured any incidents of ownership in Policy under 2042(2). III. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the earlier of: A. Insured s death, or B. Trust s delivery of written notice of termination to Premium Payer. COMMENT: Some practitioners might fear that Premium Payer could be deemed to be making a gift to Trust if the arrangement is terminated at a time when the total premiums paid by Premium Payer exceed Policy s value. This fear is not well-founded, however, because it runs contrary to the regulations tenet that Premium Payer is treated as the policy s owner under the special ownership rule (which this agreement is designed to satisfy). As the policy s owner, Premium Payer would not be making a gift any more than if he owned the policy for a few years, then sold it to Trust at a time when its value was lower than his cumulative premiums. Nonetheless, those holding this fear could draft this Section III to allow termination during the insured s life only after the cash value equals or exceeds the total premiums, or in practice not terminate until that occurs. But this can trap parties if the policy s cash value never gets that large, so the solution could cause more trouble than the supposed problem. IV. THE INSURER. Insurer shall be bound only by the provisions of and endorsements on Policy, and any payments made or actions taken by it in accordance therewith shall fully discharge it from all claims, suits and demands of all persons whatsoever. It shall in no way be bound by or be deemed to have notice of the provisions of this Agreement. V. ADDITIONAL PROVISIONS. A. Binding Effect. This Agreement shall be binding upon and inure to the benefit of Premium Payer and Premium Payer s successors, assigns, heirs, executors, and administrators, and shall be binding upon and inure to the benefit to Trust and Trust s successors and assigns. B. Amendment of Agreement This Agreement may be amended by the mutual agreement of the parties. The previous sentence notwithstanding, the parties are prohibited from amending this Agreement in such a way that provides Premium Payer any incident of ownership in Policy within the meaning of 2042, or from providing Trust any economic benefits in addition to current life insurance protection. COMMENT: Section 2042(2) applies whenever an insured can exercise an incident of ownership either alone or in conjunction with any other person. To avoid triggering this provision, the above paragraph B is drafted to prohibit even mutually agreed upon amendments from creating an incident of ownership, etc. This likely is sufficient to avoid 2042(2), but some practitioners may prefer to change the above paragraph so that only the Trust can make amendments (still subject to the same prohibitions about not creating an incident of ownership, etc.). Others may prefer to remove the ability to amend from both parties, but that eliminates a lot of flexibility. Yet other practitioners may take the position that parties to a contract always have the ability to mutually agree to amendments, regardless of any prohibition in the agreement. C. Assignment of Policy and Agreement. Trust shall have the right, without the consent of Premium Payer, to assign or transfer Policy and this Agreement to any person, entity or 5

6 trust. Premium Payer cannot assign or transfer this Agreement or the Limited Collateral Assignment attached as Exhibit B. COMMENT: Those using the secured version should use paragraph, C, above. It states that Premium Payer does not have the ability to assign or transfer this Agreement or the Limited Collateral Assignment. This may be overly protective, but is done so Premium Payer is not deemed to have, even indirectly, any of the powers described in Treas. Reg (c)(2) as incidents of ownership in the policy ( power to change the beneficiary or to assign the policy ). Those using the unsecured version have options. In the very least, they should delete from the above paragraph C the final phrase... or the Limited Collateral Assignment attached as Exhibit B. Some practitioners might also amend the paragraph to provide the insured the ability to transfer or assign his interest in the agreement. This would be done under the view that, because the insured does not hold a security interest in the policy s death benefit, there is no danger that having the power to assign the agreement could amount, even indirectly, to the insured having an incident of ownership in the policy. D. Governing State Law. This Agreement and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of the State of without regard to its conflicts of law rules. E. Operation of Agreement. This Agreement shall be operated to comply with the economic benefit tax rules under the split-dollar regulations, Treas. Reg and, in particular, the special ownership rule under Treas. Reg (c)(1)(ii)(A)(2), and shall be operated to avoid any incidents of ownership under 2042 to Insured. F. Effective Date. The effective date of this arrangement shall be the earlier of the signing of the Agreement or the payment of the first premium for the Policy by Premium Payer. COMMENT: The effective date is worded to avoid the problem that might arise if Premium Payer pays the first premium on a Trust-owned policy before the split-dollar agreement is signed. The problem is that, during the time after the premium is paid and before the signing, Premium Payer might be viewed as having provided an economic benefit to Trust in addition to life insurance protection (e.g., some cash value), thereby possibly failing to meet the special ownership rule or to obtain economic benefit tax treatment. This agreement does not anticipate that the parties would enter into it with respect to a pre-existing policy, but if they did (e.g., insured owned policy for several years, then transferred it to Trust), this effective date could be amended to eliminate reference to the first premium on the policy. IN WITNESS WHEREOF the parties have signed this Agreement this day of, 20. PREMIUM PAYER [Signature of Premium Payer] [Name of Premium Payer] TRUST By: [Signature of Trustee] [Name of Trustee], [Name and Date of Trust] 6

7 EXHIBIT A Life Insurance Policy Number Face Amount 7

8 EXHIBIT B LIMITED COLLATERAL ASSIGNMENT Reference is made to the split dollar insurance agreement (the Agreement ) of even date herewith between, Trustee of [Name and Date of Trust], including its successors and assigns (the Trust ), and, including his or her heirs, executors and administrators (the Premium Payer ). The terms, At-Death Recovery Amount and Lifetime Recovery Amount, as used in this Limited Collateral Assignment shall have the same meaning as in the Agreement, and The Northwestern Mutual Life Insurance Company ( Insurer ) shall rely upon Trust for the interpretation of such terms. To: The Northwestern Mutual Life Insurance Company, Milwaukee, Wisconsin Re: Insured: Policy No. 1. Trust hereby assigns to Premium Payer as collateral security a portion of Policy s death benefit equal to the At-Death Recovery Amount on the date of death of Insured. 2. This is a limited assignment and confers on Premium Payer none of Policy s incidents of ownership, all of which are retained by Trust as provided in the Agreement. 3. During the life of Insured, if Trust makes full payment of the Lifetime Recovery Amount to Premium Payer, then Premium Payer, as assignee, shall release this Limited Collateral Assignment and Premium Payer will provide the release to Insurer. 4. After the death of Insured, if and when Insurer has determined that the death proceeds are payable, Insurer shall divide the payment of the death proceeds, paying the amount of the At-Death Recovery Amount to Premium Payer, and paying the balance to such beneficiary(s) as have been designated by Trust. If Premium Payer is deceased at the time of payment by Insurer, Insurer shall pay the At- Death Recovery Amount to the estate of Premium Payer. Trust shall determine the At-Death Recovery Amount and provide that amount to Insurer. Insurer may fully rely on the information provided by Trust without further investigation. 5. Insurer shall be bound only by the provisions of and endorsements on Policy, and payments made or actions taken by Insurer in accordance with Policy and this Limited Collateral Assignment shall fully discharge Insurer from all claims, suits and demands of all persons whatsoever. Insurer is not obligated to investigate any actions taken by Trust, including, without limitation, the specification of the At-Death Recovery Amount. IN WITNESS WHEREOF, Trust has signed this Limited Collateral Assignment, this of 20. day TRUST By: [Signature of Trustee] [Name of Trustee], [Name and Date of Trust] 8