C—Double Split Dollar Buy-Sell

In a double split dollar buy-sell, a business owner who owns a C Corporation can establish a cross endorsement buy-sell agreement and use corporate dollars to fund the buy-sell. With the C Corporation tax rate dropped to 21 percent from the 2017 Tax Act, using low-tax corporate dollars to fund a buy-sell plan can be highly efficient for a business owner who may have a much higher personal tax rate. The double split dollar buy-sell consists of two parts: the cross endorsement of the death benefit to each owner, and the funding of the life insurance using a corporate split dollar plan as described below.

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1. Cross Endorsement Buy-Sell Plan. In a cross endorsement buy-sell plan each owner agrees to have their business shares transferred to each other in the event of death, disability or retirement. To fund the agreement, each business owner owns a policy on his or her own life and endorses a portion of the death benefit to each of the other business owners in order to facilitate the exchange of the shares for the endorsed death proceeds. This type of buy-sell allows business owners to receive a step-up in cost basis of their shares to fair market value at time of death. In addition, when the business owner owns the policy on his own life outright (instead of having the business or the other owners own the policy), the business owner can use the policy to accomplish his or her other estate planning needs.
2. Funding the buy-sell using a Corporate Split Dollar Loan. A Corporate Split Dollar Loan is an arrangement in which a C Corporation loans the annual premium on a life insurance policy to an owner. The business is the insured and owner of the policy. As policy owner, he/she has the right to designate the beneficiary of the death benefit in excess of the corporation’s cumulative loans advanced.

A collateral assignment is filed with the insurance company, when the policy is issued, and requires the loan to be repaid during the insured’s lifetime using the policy’s potential cash value accumulation, or from the life insurance proceeds, and/or from other funds.

During the loan term, the employee typically only pays tax on imputed loan interest (and not the interest itself) based on the Applicable Federal Rate (AFR). Once the cumulative loan balance is repaid, the collateral assignment is released, the agreement is terminated, and the executive retains all rights to the policy. It is also possible to accrue interest. The double split dollar plan takes advantage of the low corporate tax rate and current low interest rates: Low Corporate Tax Rate: The company account can be used as a source of low after-tax loans to pay annual life insurance premiums for the business owner. For example, at a 21 percent tax rate, it now costs the company $10,500 instead of $17,500 (35 percent), after-tax, to loan $50,000.