Many business owners enter into "split-dollar" life insurance arrangements, in which the employer and employee share the cost of life insurance. But the IRS recently changed the rules, making those plans less attractive.
The good news: Some tax benefits still remain under existing policies. The IRS handed special status to split-dollar deals in effect before Jan. 28, 2002. (IRS Notice 2002-8) If you own a split-dollar policy, here are your three options for securing your tax breaks before year-end:
Option 1: Terminate the deal
If you hold equity in the life insurance policy, terminating the arrangement may make sense. Suppose your company paid $100,000 worth of premiums for a policy on your life, over several years. Now you own $140,000 worth of cash value in the policy.
The $40,000 excess cash value is considered equity in the policy. The IRS says that equity may be considered taxable income. So unwinding t...(register to read more)