General Practice, Solo & Small Firm DivisionMagazine
Volume 17, Number 3
CORPORATE-OWNED LIFE INSURANCE HELPING YOUR CLIENTS PROTECT THEIR INTELLECTUAL PROPERTY GENERATORS
BY EVAN W. POLANSKY
IIn addition to protecting a client's intellectual property, as "multidisciplinary" trusted advisors lawyers also must protect the ongoing value of the executive, partner, or employee who developed the intellectual property and likely will develop more intellectual property in the future. This consideration is increasingly important in today's information age, as intellectual property arguably is becoming more valuable than real property.
What is the value of the intellectual property generator to a company? What would the company lose (or not gain) in the event of that person's death? What can the company do to protect itself? How can this be done in a cost-effective manner?
Corporate-owned life insurance (COLI) is one answer to these questions. The advantages to this approach are twofold: (1) the tax advantages during accumulation and distribution-tax-deferred growth and tax-free access potential; and (2) the recovery of the premium costs at the death of the intellectual property generator, through tax-free life insurance proceeds.
COLI, particularly so-called split-dollar plans, also provides the employee with an acknowledgement of her value to the company. The cash value and the death benefits that the employee can receive through split-dollar plans provide a powerful retention incentive-an increasingly important consideration in today's tight labor market.What Is a Split-Dollar Plan?
In a split-dollar plan, the employer and the employee enter into an agreement to share the costs and benefits of a life insurance policy. The death benefit share allocated to the employee provides an economic benefit to the employee. Typically, the employer owns the cash value and the employee is entitled to the amount at risk. This economic benefit is taxable to the employee unless offset by premium contributions. One variation, endorsement split-dollar, permits the employer to own the policy and control the cash value throughout the duration of the plan while allowing the employee to choose the beneficiary of the risk portion of the policy during the preretirement years. The second feature serves to strengthen the loyalty of the intellectual property-generating employee to his employer. (Because there have been many revenue rulings on split-dollar plans, parties should always seek the advice of legal, accounting, and financial advisors.)How It Works
Let's say there is a female employee who is very valuable to her company. An initial face amount of life insurance will reflect the value of this intellectual property generator to her employer. There is a contribution by the employee to offset her economic benefit at special split-dollar rates that are substantially less extensive than normal "street" rates-resulting in highly leveraged benefits to the employer and the employee based on a relatively modest annual premium payment.
When the employee turns 65, the split-dollar arrangement is terminated, and the employer uses the policy's cash value to pay the employee a deferred compensation benefit for the rest of her life.
Depending on the type and terms of the agreement used, split-dollar may offer the following advantages:
Advantages to the Employer and the Employee
- Competitively priced insurance
- Capital transfer
- Potential for cost recovery
Advantages to the Employer
- Protection of the economic contribution of the intellectual property-generating employee to the employer
- Balance sheet asset
- Increased productivity
Advantages to the Employee
- Life insurance acquisition
- Use of business dollars