Capital Split Dollar Agenda

Capital Split Dollar Agenda

Capital Split Dollar Agenda

Capital Split Dollar is a powerful financial strategy for creating tax free wealth under the current tax
laws. To protect your from IRS assessing penalties if there is an unsuccessful audit, BMI has procured an
opinion letter on the strategy from a major law firm. You may want to acquire an opinion letter specific
to you for further protection. The strategy combines leverage through a lender with the unique financial
attributes of an indexed universal life insurance policy. While there are several risks, they are
manageable and hedged in this strategy. It is important you and your advisors have an appreciation for
the complexity and the benefits that are integral to CSD.
The following list outlines some of the important concepts and issues you need to understand
sufficiently to assess the risk.

Important Points of Understanding

a. Terms of the loan
b. Interest rate risk during term of loan
c. Renewal of loan during funding period

a. The role of collateral
b. Alternative source of collateral
c. How Collateral is calculated
d. What happens if there is a collateral shortfall

a. How insurance carriers buy call options
b. Role of call options
c. Caps and Participation rates
d. “In the money” vs. “Out of the money”
e. History of S&P returns compared to options
f. What happens when the call options expire

a. The Box – impact of expenses and mortality costs
b. Maximum MEC Funding – why a five year loan buildup
c. Limitations and role of the illustration
d. Why future reprojections may be different
e. Uncertainty of income projections

a. Two methods of repayment
    i. Withdraw to basis
    ii. Borrow from the policy values

b. Bank Loan is transferred to a policy loan
    i. Interest paid annually, added to the policy loan
    ii. Loan ultimately repaid from death proceeds
    iii. If policy cancels loan is offset by basis
c. Interest costs on internal borrowing increase loan
d. What is an Alternate loan?
e. What is a standard loan?

a. Existing cash values and policy loans for income
b. What happens if policy underperforms original
c. What happens if policy overperforms original
d. When income is borrowed from the policy – what
happens to policy values?

a. What if it lapses?
      i. Any gain over basis will be taxed as ordinary
      ii. Basis equals remaining cash values, all
          borrowings and interest accruals plus
          premiums paid less all policy loans

b. What if the policy is cancelled?
       i. Same result as if the policy lapses
c. What if the policy results in a death benefit?
      i. Death benefit is income tax free
      ii. Death benefit pays off all policy indebtedness

a. Overloan Protection Rider
b. Impact on policy – stops benefit distribution