Split-dollar life accounting primer

Guidance for these collateral assignment plans, popular for retaining and rewarding key executives

by Jennifer Jackson, Jeff Ziliani and Kirk Sherman

Split-dollar life insurance plans are popular among credit unions seeking to retain and reward key executives. The most popular format is “collateral assignment split dollar,” where the credit union pays premiums and has a right to recover those premiums from the policy’s cash value or death proceeds. The executive owns the policy and grants the credit union a lien as security for its recovery by “collaterally assigning” the policy to the credit union.

The IRS treats collateral assignment split dollar as a loan to the executive, according to Treasury Reg. § 1.7872-15. The executive must either pay interest on the loan (annually or in a lump sum at death) at the applicable federal rate, or must report the forgiven interest as attributed to income each year.

Collateral assignment split dollar accounting treatment is controlled by Emerging Issues Task Force No. 06-10 (also referred to as Topic 715, Subtopic 60 under the new Financial Accounting Standards Codification) and follows the loan characterization laid out in the legal document.

Each collateral assignment split dollar arrangement is unique and requires specific analysis to determine the correct accounting treatment. However, the general treatment of the key lifecycle events is as follows:

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