Earnings for the quarter ended March 31, 2017, benefited from $1.7 million, or $0.04 per diluted share, of excess tax benefits and $1.5 million, or $0.02 per diluted share, of tax-exempt income from bank-owned life insurance proceeds in excess of the cash-surrender value
of the policies.
When an insured key person retires or resigns, the company often cancels its corporate-owned policy and takes the cash-surrender value
, if any is remaining.
Although the IRS has not taken an official position on this issue for split-dollar arrangements entered into before final regulations are issued, the insured could be taxed on the policy's excess cash-surrender value, which could be substantial.
The IRS is allowing taxpayers to change the future tax exposure of the cash-surrender value in excess of premiums, if they terminate the split-dollar arrangement before 2004 or treat the premiums paid as a loan to the insured.
A life insurance valuation determines the fair-market value of a life policy, while a life settlement gives policyowners the ability to access this value by selling their existing policies and receive a cash amount in excess of cash-surrender value
Basically, however, noncountable assets include a home used as a primary residence, $2,000 in cash, an automobile, personal jewelry, household effects, prepaid funeral expenses, a burial account and life insurance policies with no cash-surrender value
(term life insurance).
The notice explicitly rejected the concept first announced in TAM 9604001 (and suggested in Notice 2001-10) that the Service would currently tax any increase in the cash-surrender value of a life insurance policy that exceeded the employer's interest in the policy while the split-dollar arrangement was in force.
Additionally, the policy's cash-surrender value will not represent property transferred to the employee.
These are generally whole-life contracts under which the employer pays the premiums and the employee agrees to pay back the premiums to the employer out of the policy's cash-surrender value. In some cases, the employee owns the policy and collaterally assigns it to the employer (generally up to the value of the premiums paid).
83 compensation if he obtains a vested interest in the policy's cash-surrender value (less any amount paid by the employee for that right and less any increase in the cash-surrender value due to interest or earnings on employer premiums).
Although the terms of these split-dollar agreements vary, the common feature is that, over the life of the split-dollar agreement, the trust has access to a disproportionately high percentage of the cash-surrender value
and death benefit under the policy, compared to the percentage of premiums paid by the trust.