Collateral Assignment Split Dollar Life Insurance (CASDLI) is a life insurance policy arrangement that is commonly used in estate planning, business succession planning, and executive compensation. This arrangement allows two parties, typically an employer and employee, to share the benefits and costs of a life insurance policy. The policy’s death benefit is split between the two parties, and the premiums are also split between them. The employee is usually the insured party, while the employer is the policy owner.
One of the advantages of CASDLI is that it provides the employee with life insurance coverage without having to pay the full premiums. This can be a valuable benefit for highly compensated executives or business owners who may not be able to afford the full cost of life insurance coverage on their own. The employer benefits by receiving a portion of the death benefit if the employee dies while employed, which can help offset the cost of the premiums paid.
There are two types of CASDLI arrangements: endorsement split dollar and collateral assignment split dollar. With endorsement split dollar, the employer pays the premiums and is the policy owner, while the employee is the insured party. The employee is named as the beneficiary of the policy, and upon the employee’s death, the death benefit is paid to the employee’s estate or designated beneficiaries. The employee’s estate is responsible for paying any taxes owed on the death benefit.
With collateral assignment split dollar, the employee is responsible for paying a portion of the premiums, and the policy is owned by a trust that is established for the benefit of the employee’s designated beneficiaries. The trust is the policy owner and pays the premiums, while the employee is the insured party. The employee assigns a portion of the policy’s death benefit to the employer as collateral for the premiums paid by the employer. Upon the employee’s death, the trust receives the remaining death benefit and pays any taxes owed on the death benefit.
Accounting for CASDLI can be complex, as there are a number of factors that must be considered. The employer must account for the premiums paid as an expense, while the employee may need to report a portion of the premiums paid as income. The employee may also need to report a portion of the death benefit as income, depending on the terms of the policy and the arrangement with the employer.
The accounting treatment for endorsement split dollar and collateral assignment split dollar arrangements differs slightly. With endorsement split dollar, the employer would record the premiums paid as an expense and the employee would not report any income. With collateral assignment split dollar, the employee would need to report any premiums paid as income, and the employer would record the premiums paid as a loan receivable from the employee. The employer would also need to record the death benefit received as a reduction in the loan receivable.
It is important to note that the tax implications of CASDLI arrangements can be complex and may vary depending on the specific arrangements in place. Employers and employees should consult with tax and legal professionals to ensure that they are in compliance with all applicable laws and regulations.
In conclusion, Collateral Assignment Split Dollar Life Insurance is a valuable tool for estate planning, business succession planning, and executive compensation. It allows two parties to share the benefits and costs of a life insurance policy, providing the employee with life insurance coverage without having to pay the full premiums. Accounting for CASDLI can be complex, and it is important to consult with tax and legal professionals to ensure compliance with all applicable laws and regulations.