Split Dollar Life Insurance
A flexible planning strategy that can help affluent families and business owners fund life insurance while balancing liquidity, wealth transfer, and long-term planning objectives
The Planning Challenge
Split Dollar Life Insurance
For affluent families and business owners, split dollar life insurance may provide a flexible way to fund significant life insurance coverage as part of a long-term planning strategy. However, funding a large policy can create challenges. Significant gifts may be required, liquidity may be tied up in other assets, and funding substantial premiums may not always align with broader planning objectives.
Split dollar life insurance provides a flexible approach that allows two parties to share the costs and benefits of a life insurance policy under a written agreement. When structured appropriately, it can help support estate planning, wealth transfer, business succession, and executive benefit strategies.
Manage
Gifting
Large life insurance policies often require significant premium commitments. Split dollar arrangements may help reduce the amount of assets needed to fund coverage.
Preserve
Liquidity
For many families and business owners, wealth is concentrated in businesses, real estate, or investment portfolios. Split dollar can help preserve access to capital.
Support
Planning Goals
Life insurance is often used to address estate liquidity, wealth transfer, succession planning, and executive retention objectives. Split dollar can help align funding with those goals.
Increase
Flexibility
Split dollar arrangements can be structured in a variety of ways based on the objectives of the parties involved, allowing funding strategies to be tailored to specific planning goals.
Split Dollar Life Insurance
What is Split Dollar Life Insurance?
Split dollar life insurance is a planning arrangement in which two parties agree to share certain costs and benefits associated with a life insurance policy. A written agreement defines how premiums will be funded, how policy values and benefits will be allocated, and the rights and obligations of each party.
Depending on the parties involved and their objectives, split dollar may be used to support estate planning, wealth transfer, business succession, and executive benefit strategies. The specific structure can vary considerably, making careful coordination among the parties and their tax, legal, and insurance advisors important.
Parties involved
Two parties—such as family members, a business and an owner or executive, or an individual and a trust—agree to enter into a split dollar arrangement.
Split Dollar Arrangement
The parties establish a written agreement outlining how premiums will be funded, how policy values and benefits will be allocated, and each party's rights and obligations.
Life Insurance Policy
A life insurance policy is issued on the life of the insured, with ownership and beneficiary arrangements structured to support the objectives of the split dollar agreement.
Benefits Distributed
Policy benefits are distributed according to the terms of the agreement and policy beneficiary designations, helping support the intended estate, wealth transfer, business, or executive benefit objectives.
When structured appropriately, split dollar life insurance can be a powerful tool for aligning life insurance with your broader estate and business planning goals.
Split Dollar Life Insurance
Common Split Dollar Structures & Applications
Split dollar life insurance can be structured in different ways depending on policy ownership, funding arrangements, the relationship between the parties, and their planning objectives. The following are several structures and applications commonly encountered in business and estate planning.
Endorsement
Split Dollar
In an endorsement arrangement, an employer or other sponsoring party generally owns the policy and provides another party with rights to a specified portion of the policy's death benefit.
Often used in employer-sponsored arrangements.
Collateral Assignment
Split Dollar
In a collateral assignment arrangement, one party generally owns the policy while another advances premiums and receives a collateral assignment securing its rights under the agreement.
Often associated with arrangements structured under the loan regime.
Private
Split Dollar
Private split dollar generally involves an arrangement between private parties, such as a family member and an ILIT, to help fund life insurance for estate and wealth transfer objectives.
Often used with family and estate planning objectives.
Important Planning Considerations
The federal tax treatment of a split dollar arrangement generally depends on how the arrangement is structured and may fall under either the Economic Benefit Regime or the Loan Regime. These rules can affect taxation, reporting requirements, and the long-term economics of the arrangement, making coordination with tax and legal advisors essential.
Who May Benefit
Situations Where Split Dollar Life Insurance
May Be Considered
Split dollar life insurance is not a one-size-fits-all strategy. However, it may be appropriate for affluent families, business owners, and companies seeking a flexible approach to funding life insurance while addressing broader estate, wealth transfer, or business planning objectives.
Affluent Families
Families with substantial wealth who want to fund significant life insurance coverage while preserving liquidity and coordinating the coverage with their broader estate and wealth transfer plans.
Business Owners
Owners of closely held businesses who may need substantial life insurance as part of their succession, continuity, or key person planning.
ILIT Planning
Families using an irrevocable life insurance trust who are evaluating alternatives for funding premiums while balancing liquidity, gifting, and long-term estate planning considerations.
Executive Business Planning
Businesses seeking a customized life insurance strategy to attract, retain, or reward key executives as part of a broader compensation and benefits program.
Who May Benefit
Situations Where Split Dollar Life Insurance
May Be Considered
Split dollar life insurance is not a one-size-fits-all strategy. However, it may be appropriate for affluent families, business owners, and companies seeking a flexible approach to funding life insurance while supporting broader planning objectives.
Affluent Families
Families with substantial wealth who want to fund significant life insurance coverage while preserving liquidity and coordinating the coverage with their broader estate and wealth transfer plans.
Business Owners
Owners of closely held businesses who may need substantial life insurance as part of their succession, continuity, or key person planning.
ILIT Planning
Families using an irrevocable life insurance trust who are evaluating alternatives for funding premiums while balancing liquidity, gifting, and long-term estate planning considerations.
Executive Business Planning
Businesses seeking a customized life insurance strategy to attract, retain, or reward key executives as part of a broader compensation and benefits program.
Key Considerations
Important Factors to Evaluate Before Implementing a Split Dollar Arrangement
Because split dollar arrangements involve multiple parties, legal agreements, tax considerations, and long-term policy commitments, careful planning is essential.
The appropriate structure depends on the parties involved, ownership and funding objectives, tax treatment, and long-term planning goals.
Ownership & Control
The arrangement should clearly define policy ownership, premium responsibilities, access to policy values, and each party's rights under the agreement.
Tax Considerations
Tax treatment can vary depending on how the arrangement is structured and funded. Coordination with the client's tax and legal advisors is essential.
Exit Strategy
The parties should consider how the arrangement may be modified, terminated, or unwound and how policy values and obligations will be addressed if circumstances change.
Ongoing Administration
Split dollar arrangements require ongoing documentation, monitoring, and periodic review to help ensure the agreement and policy continue to support their intended objectives.
Potential Planning Applications
How Split Dollar Life Insurance is Commonly Used
Split dollar arrangements can be customized to support a variety of planning goals for individuals, families, and businesses.
Estate Liquidity Planning
Split dollar may help fund life insurance intended to provide liquidity for estate taxes and other obligations without requiring substantial upfront gifts or the sale of illiquid assets.
Wealth Transfer Planning
Families may use split dollar to help fund life insurance within an estate plan while coordinating premium funding, liquidity, and long-term wealth transfer objectives.
Business Succession Planning
Business owners may use split dollar to help fund life insurance supporting succession, ownership transition, or other business continuity objectives.
Executive Benefit Planning
Businesses may use split dollar as part of a customized benefit strategy designed to attract, retain, and reward key executives.
FAQ
Frequently Asked Questions
What is split dollar life insurance?
Split dollar life insurance is a planning arrangement in which two parties agree to share certain costs and benefits associated with a life insurance policy. A written agreement defines how premiums will be funded, how policy values and benefits will be allocated, and the rights and obligations of each party.
What types of split dollar arrangements are available?
Split dollar arrangements can be structured in different ways depending on policy ownership, funding, the relationship between the parties, and their planning objectives. Common approaches include endorsement and collateral assignment arrangements, while private split dollar is often used in family and estate planning. The appropriate structure depends on the specific circumstances and objectives of the parties involved.
Who typically uses split dollar life insurance?
Split dollar life insurance is often considered by affluent families, business owners, companies seeking executive benefit strategies, and families using irrevocable life insurance trusts (ILITs). It is generally considered when significant life insurance coverage is needed and a flexible funding approach may support broader planning objectives.
Economic Benefit vs. Loan Regime: What's the Difference?
The Economic Benefit Regime and Loan Regime are two different frameworks that may govern the federal tax treatment of a split dollar arrangement. Under the Economic Benefit Regime, the value of life insurance protection provided to a party may create a taxable economic benefit. Under the Loan Regime, premium advances are generally treated as loans subject to applicable tax rules. The appropriate treatment depends on how the arrangement is structured, making tax and legal guidance essential.
Can split dollar life insurance be used with an ILIT?
Yes. In certain situations, split dollar may be used with an ILIT to help fund life insurance while balancing liquidity, premium funding, and wealth transfer objectives. The appropriateness of this approach depends on the overall estate plan, trust design, tax considerations, and long-term planning goals.
Is split dollar life insurance right for every situation?
No. Split dollar life insurance is a specialized planning strategy that requires careful consideration of ownership, taxation, administration, policy performance, and exit planning. Its complexity and long-term nature mean it may not be appropriate for every family, business, or planning objective.
Evaluate Whether Split Dollar Life Insurance May Support Your Planning Goals
Split dollar arrangements require careful coordination of the insurance strategy with the client's broader planning objectives. We work collaboratively with clients and their tax and legal advisors to evaluate the structure, funding approach, and long-term policy considerations.
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