4028 / What are the income tax consequences of the transfer or rollout of a policy subject to a split dollar arrangement entered into after September 17, 2003?
Under the split dollar regulations, on the transfer of a policy to a nonowner, the nonowner generally is considered to receive the cash value of the policy and the value of all other rights in the policy minus any amounts paid for the policy and any benefits that were previously included in the nonowner’s income. Amounts that previously were included in income due to the value of current life insurance protection that was provided to a nonowner may not be used to reduce the amount the non-owner is considered to receive on roll-out. Thus, the taxation on the value of current life insurance protection will not provide a nonowner with any basis in the policy, although taxation for a previous increase in cash value will add basis for a nonowner.1
No inference is to be drawn regarding the tax treatment of split dollar arrangements entered into before September 18, 2003 ( Q 4027).2
1. Treas. Reg. § 1.61-22(g).