E—Controlling Stockholder Split Dollar

The concept of a controlling stockholder, also referred to as a “majority stockholder,” is important with respect to split-dollar plans in which the death benefit is shared between the corporation and the insured’s personal beneficiary. As with any key person insurance, that part of the death benefit received by the corporation on a policy insuring a controlling stockholder is included with other assets in valuing the corporation, and thus in determining the value of stock in the controlling stockholder’s estate. But that part of the death benefit received outside of the corporation by a personal beneficiary or a trust will also be included in the insured’s estate where the insured was a controlling stockholder, since any incidents of ownership held by the corporation are attributed to the insured through his stock ownership as a controlling stockholder. A person is considered a controlling stockholder when, at the time of his death, he owns more than 50 percent of the voting stock of a corporation. A “bare bones” collateral assignment strategy where the trust retains all rights other than the lone right for the employer to be reimbursed at death is generally believed to avoid inclusion.

Assume a split-dollar plan is funded by a $5,000,000 policy paying $1,000,000 to the corporation and $4,000,000 to the employee’s beneficiary. Because corporate ownership is attributed to the controlling stockholder, the $4,000,000 death benefit paid to the personal beneficiary is also included in the estate.