Structuring the Loan in Loan Regime Split Dollar


by TJ Telford, Area Vice President for BFB Gallagher and Kirk Sherman, Partner at law firm of Sherman & Patterson, Ltd

Loan regime split dollar (LRSD) is becoming a staple in credit union executive compensation packages. Over the last 15 months, the number of credit unions using LRSD has grown by 40%.1 Twenty new credit unions added LRSD each quarter. Boards like LRSD because of its favored tax treatment for the executive and cost recovery for the credit union.

LRSD designs vary widely. They—
•  Use different insurance products.
•  Vary the timing of the credit union’s deposits into the policy.
•  Impose a wide spectrum of vesting and forfeiture requirements.
•  Allow access to the funds in the policy at different times.
•  Divide the death proceeds in different ways.

Notwithstanding these variations, all LRSD designs have two things in common. First, the credit union pays funds into a life insurance policy and is repaid those funds at a later date. This creates the “loan” element for which the arrangement is named.2 Second, all credit union loans accrue interest. The executive must either pay the interest or report it in income.3 If payments are required, interest can be paid annually or can be accrued and compounded and paid from the policy death proceeds.

LRSD loans can be structured as demand loans or term loans, and they can be recourse or nonrecourse. The loan structure selected will largely determine whether the arrangement succeeds or fails.

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