As a balance sheet-sensitive business owner, navigating the financial complexities of managing your business’s financial health while planning for retirement can be daunting. A Split Dollar plan may be the solution you’ve been seeking. It offers an appealing blend of flexibility, financial efficiency, and security. Let’s explore what this means for your business.
What is a Split Dollar Plan?
A Split Dollar plan is a financial strategy used in collaboration between businesses and their owners or employees. It’s a unique approach that can assist pass-through owners in saving for retirement, all while keeping the company’s balance sheet in mind. This plan leverages life insurance to benefit both the business and the individual.
The Split Dollar plan is usually executed in two arrangements:
- Endorsement Split Dollar Arrangement: The business retains the cash values on its books. It means the company controls the policy’s cash value, allowing for more considerable balance sheet assets.
- Loan Regime Split Dollar Arrangement: The business retains an interest in cash values and death benefits equal to their split-dollar loan. This setup gives the company control over a portion of the policy’s cash value but also has a stake in the death benefits.
Key Benefits of a Split Dollar Plan
For the Business:
- Balance Sheet Efficiency: By retaining cash values or interests, the business can reflect these assets on its balance sheet, potentially strengthening its financial standing.
For the Individual:
- Income Tax-Free Death Benefit: The beneficiaries enjoy an income tax-free death benefit, providing a financial safety net.
- Tax-Deferred Growth Opportunities: The policy allows for growth in cash value on a tax-deferred basis, leading to potentially higher returns.
- Tax-Efficient Financial Resource: Through income tax-free policy loans or withdrawals, the individual can access funds tax-efficiently. It must be noted that these loans and withdrawals will reduce the policy’s cash value and death benefit.
Note: Certain tax conditions apply. For example, a modified endowment contract (MEC) policy has specific tax considerations, including possible additional federal income tax if withdrawals are made before age 59½.
A Practical Example
Imagine a thriving software development business. Jane, the owner, is concerned about her retirement savings and the company’s balance sheet. She enters into an Endorsement Split Dollar Arrangement with her business.
Here’s how it works:
- Jane’s company purchases a life insurance policy for her life.
- The company retains the policy’s cash value, reflecting it as an asset on its balance sheet.
- Jane names her family as the beneficiaries, ensuring they receive an income tax-free death benefit.
- Over time, the policy enjoys tax-deferred growth.
- Should Jane need funds, she can utilize the policy’s income tax-free loans or withdrawals, considering the above mentioned stipulations.
Through this strategy, Jane’s company maintains a stronger balance sheet while she secures her family’s financial future and enjoys a tax-efficient way to access funds.
Conclusion
A Split Dollar plan can be a multifaceted and strategic approach for balance sheet-sensitive business owners. Understanding the structure and applying it thoughtfully can be a valuable tool for enhancing individual and business financial stability. As with any intricate financial strategy, consulting with a financial professional with expertise in Split Dollar arrangements is advisable to ensure alignment with your business needs and goals.
