Split Dollar Life Insurance Estate Planning

  • 4 min read
  • May 07, 2021

There are a few major ways that split dollar life insurance policies are used by employers and employees. Also known as private split-dollar life insurance these are agreements between individuals or involving an irrevocable life insurance trust.


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One such plan was at the center of a recent controversy between a decedents estate and the IRS.

Split dollar life insurance estate planning. Sometimes split-dollar arrangements are used as an estate planning vehicle between family members and their trusts often referred to as private split-dollar arrangements. The IRS and Treasury Department still felt the untaxed equity in a split dollar life insurance policy was abusive. Split-Dollar Overview and Background A private split-dollar insurance arrangement is one in which two persons or trusts together purchase insurance on the life of a particular person.

Particularly estates regularly utilize private split-dollar arrangements. If payments made by a non-owner to an owner were treated as split-dollar loans under 17872-15 and the split-dollar life insurance arrangement is modified such that after the modification the non-owner is the owner within the meaning of paragraph c 1 of this section of the life insurance contract under the arrangement paragraphs d through g of this section apply to the split-dollar life insurance. And ii the party paying for the premiums is entitled to recover all or any portion of those premiums and such.

As a reminder split dollar agreements which are a highly effective estate planning technique for high net worth individuals can be used in a business setting or privately with family members. How does split-dollar life insurance work for estate planning. Split dollar life insurance is widely used in gift and estate planning and can be an important part of the compensation package of many key employees.

I either party to the arrangement pays all or a portion of the premiums on the life insurance contract. In Estate of Cahill 2 the Tax Court found that the cash surrender value of a split-dollar life insurance arrangement was. In addition to split-dollar plans between an employer and employee private split-dollar arrangements also exist.

The contracts protect your life insurance proceeds from an estate tax. The Role of Split Dollar. This can apply to split-dollar plans that are used to save on taxes or those where the cash value is transferred as an asset to a corporation as part of an employer agreement.

You dont have to cover all of your employeesthe coverage amounts and terms of the split dollar arrangement are generally not subject to Employee Retirement Income Security Act ERISA. These regulations define a split-dollar life insurance arrangement as an arrangement between an owner and a non-owner of a life insurance contract in which. Split-dollar life plans offer an effective means to limit or eliminate gift tax issues associated with funding a life insurance policy owned by an ILIT by reducing the amount deemed to be gifted from the full premium funded.

2 Traditionally split dollar involved an employer-employee relationship. Split Dollar Life Insurance For Estate Planning. Split Dollar gets its name because it involves splitting the benefits of a life insurance policy between you and your key employee.

Split dollar life insurance has been discussed here previously. Applies this is modeled after the endorsement method of split dollar The measure of value transferred each year to the policy holdernon-owner is the cost of a single years life insurance coverage. In its broadest application split dollar is an arrangement whereby two parties enter into an agreement to split the costs premiums and benefits cash value and death benefit of a life insurance policy.

Lets say for example you have a large estate and are looking for a strategy to minimize estate taxes. The amount of economic benefit is determined by reference to the insurers regularly issued publicly available one year term rules or Table. Wealthy individuals can also form agreements called private split-dollar.

Split-dollar life insurance in estate planning Split-dollar life insurance isnt just a feature of employee benefit plans. Funding Buy-Sell Agreements. In the estate planning context this typically involves the insured and an irrevocable life insurance.

Estate planning Split-dollar Private split dollar is a flexible relatively conservative and cost-effective tool for incorporating life insurance into a multi-purpose estate plan which can provide family security generate estate liquidity and create a multi-generational legacy. What Can Split Dollar Life Insurance Be Used For. Split Dollar Plans are a cost-effective and tax-efficient way to provide benefits using life insurance.

If the employee dies prematurely within that three-year window estate taxes might be collected on the life insurance benefits. The rules were disjointed and often applied inconsistently. Even with the Revenue Rulings Split Dollar life insurance arrangements were economical and attractive for estate planning and executive compensation.


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