'Split-Dollar' Tax Havens Under Threat

One of the favourite tax-minimising techniques of US corporations, so-called 'split-dollar' life insurance on key executives, is under threat. The Sarbanes-Oxley Act, passed by Congress in the aftermath of the Enron and other corporate scandals last year, includes a provision which bans corporate loans to executives, and many advisers consider that this applies to split-dollar policies.

Under a split-dollar policy, the company pays a premium to buy a life insurance policy, and splits the cost with the executive - but the executive has to pay only the 'term' insurance part of the premium, normally just a small fraction of the whole cost. The premium sits in a tax-privileged investment account, and the executive is allowed to borrow from this account. Repayment is not necessary, because the death benefit repays the company for its premium outlay. These arrangements are often very large indeed, with premiums and the resulting tax-free loans amounting to many millions of dollars.

Split-dollar arrangements are a refinement of the employee life insurance programs which many corporations have used for years to insure employees' lives, with or without their knowledge, in order to protect investment income from tax. These programs have evolved over the years as Congress and the IRS have introduced rules to limit their use, and by now they are only effective if they are based on external borrowing.

Sarbanes-Oxley, which comes into force in January, has precipitated a review of the whole corporate life insurance sector. However, in the past, the insurance industry's lobbying machine, assisted by the coporations themselves, has been highly effective at limiting Congressional action against such tax shelters, and with a Republican Congress it would perhaps be surprising to see major change.