Private Split-Dollar Insurance

By: Martin M. Shenkman, CPA, MBA, JD

Private split-dollar insurance is not a type of insurance but rather a method of structuring the ownership of life insurance on an insured. The concept of "private" split-dollar connotes an arrangement done between individuals and family trusts in contrast to a split-dollar arrangement between an employer and employee which is where the concept of split-dollar was first developed. An example of private split-dollar insurance would be to have an irrevocable life insurance trust ("ILIT") own an insurance policy on the life of the insured family member, and that insured, or another family member or family trust would share (split) the cost of the life insurance owned by the ILIT. For example, the ILIT could purchase a permanent life insurance policy and pay the portion of the premium that would be required for a term policy, with the insured or another family member (Premium Payor) paying the balance of the premium. This mechanism can substantially reduce the amount of cash the grantor/insured has to contribute to the ILIT and therefore reduce the gift tax cost of paying for the insurance in early years. The Premium Payor's interests in the policy would be secured by a collateral assignment of insurance proceeds so that in the event of death the Premium Payor would be repaid the premiums advanced. Under the 2003 Regulations governing split-dollar arrangements implemented following the effective date (or prior arrangements materially modified after that date) there are two paradigms used for the taxation of split-dollar arrangements, a loan regime and an economic benefit regime.

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