AALU: Death Benefit Only Plans

Death Benefit Only Plans – Not Dead Yet

As income tax rates rise, death benefit only plans can be an appealing way to attract or retain selected key employees.

As the name implies, death benefit only plans generally provide death benefits to a current employee’s surviving beneficiaries. These plans typically are:

  • subject to less complex tax rules and ERISA regulations than other non-qualified deferred compensation plans that provide lifetime benefits to the employee and,
  • can be relatively easily and informally funded using life insurance.

Death benefit only plans may make sense for employers looking to attract and retain younger talent whose commitment to the company is untested, as key employee carve-outs from group-term life insurance programs, or as an alternative to split-dollar life insurance plans where premium or economic benefit costs to the employee may not make economic sense.

The employee should not be subject to income tax on the value of the current life insurance protection and, with proper structuring, should not incur estate taxes on the death benefit paid to his or her beneficiaries (although they will pay income tax on those benefits). The employer generally cannot take a current deduction for the life insurance premiums but should receive the death benefits without income tax (if it complies with employer-owned life insurance (“EOLI”) tax rules) and should be able to deduct the payments made to the surviving beneficiaries.

Learn about the benefits and potential risks of a Spousal Lifetime Access Trust in the latest Washington Report.

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