PRIVATE SPLIT DOLLAR

Situation:

  1. You have a client that is considering using a life insurance policy as an estate planning tool
  2. Client does not want to pay gift taxes on the amount of life insurance premiums made to an Irrevocable Life Insurance Trust (ILIT)
  3. ILIT alone does not have the cash flow to fund the policy premiums
  4. Financing premiums may not be economical or appealing

Solution:

You client and their spouse can minimize gift taxes using a Split Dollar arrangement. In this arrangement the trustee of the ILIT purchases a survivorship life insurance policy on your clients. Your clients provide the ILIT with the funds to pay the economic death benefit portion of the premiums, which initially represents only a fraction of the full premium due, in the form of an annual gift. The balance of the premium is lent to the ILIT by your clients. Your clients are assigned the greater of the policy’s cash values or premiums paid as collateral.

Benefits:

  1. Estate liquidity – Your clients can secure the amount of protection they need while minimizing or eliminating gift taxes
  2. Reduction in gift tax value – The economic benefit rates for survivorship policies are extremely low, reducing the arrangement’s annual gift tax value
  3. Cost-effective alternative to financing premiums – The gift tax cost of the arrangement can be significantly lower than the gift tax cost of financing premiums
  4. Leveraged gifts – Annual gift tax exclusion gifts can be leveraged significantly with life insurance, especially when the gift is based on economic benefit rates for a survivorship life insurance policy

Considerations:

  1. Cash flow – Cash flow is required when using a private Split Dollar plan
  2. Increasing economic benefit – The economic benefit costs will increase over time, thereby increasing the annual gift tax value of the arrangement
  3. Estate taxation of repayment – They repayment of the collateral assignment amount is included in your client’s taxable estate