Corporations established under Subchapter S of the Internal Revenue Code often carry an asset on their books called a Triple “A” (Accumulated Adjustment) Account. This account represents income of the business entity that has been retained in the company. In an “S” corporation, income passes through to the business owners on their K-1 whether or not they actually receive the money.

The AAA asset account often accumulates over a period of years and is represented by inventory, bank accounts used to obtain new equipment or as a contingency fund. In some cases, the funds are required by banking covenants or bonding issues.

If an “S” corporation has a non-deductible expense, such as the payment of a life insurance premium, this expense may be charged against the AAA instead of to the owners. The AAA may be used as the funding tool for life insurance and produce a very favorable income and gift tax result for the business owners. Under an Endorsement Split Dollar arrangement, the income attribution to the owners would be “economic benefit” instead of premium. This treatment would also extend to the gift tax treatment of the life insurance benefit. A specimen Split Dollar illustration and a copy of the Internal Revenue Code is attached to this article for your review.

For additional information, please contact Affiliated Financial Partners, LLC.