Split Dollar Life Insurance
A flexible planning strategy that can help affluent families and business owners fund life insurance while balancing liquidity, gifting, and long-term planning objectives
The Planning Challenge
Split Dollar Life Insurance
Many affluent families and business owners recognize the value of life insurance as part of their 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 transferring capital to fund premiums may not always align with broader planning objectives.
Split dollar life insurance was developed as 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.
Reduce
Gifts
Gifts
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
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 of a life insurance policy. The arrangement is governed by a written agreement that defines how premiums are funded, how policy values are allocated, and how benefits are distributed.
Depending on the objectives of the parties involved, split dollar can be used to support estate planning, wealth transfer, business succession, and executive benefit strategies. While the structure of each arrangement may vary, the underlying goal is often the same: creating a flexible and efficient way to fund life insurance coverage.
Parties involved
Two parties (such as family members, a business owner and an entity, a trust, or an employer and executive) agree to enter into a split dollar arrangement.
Split Dollar Arrangement
The parties establish a written agreement outlining how premiums will be paid, how policy values will be allocated and how benefits will be distributed.
Life Insurance Policy
A life insurance policy is issued on the life of the insured, and the agreement determines each party's rights and responsibilities with respect to the policy.
Benefits Distributed
Upon the death of the insured, policy benefits are distributed according to the terms of the agreement to help achieve estate liquidity, wealth transfer, and other planning 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 Types of Split Dollar Arrangements
Split dollar life insurance can be structured in several ways depending on the ownership, funding, and planning objectives of the parties involved. The following are three common arrangements used in business and estate planning.
Endorsement
Split Dollar
Often used in employer-sponsored arrangements, endorsement split dollar allows an employer to provide life insurance benefits to a key employee while retaining policy ownership.
Collateral Assignment
Split Dollar
A collateral assignment split dollar arrangement generally involves one party advancing premiums while retaining right to recover those amounts according to the terms of the agreement.
Private
Split Dollar
Private split dollar arrangements are commonly used among family members, trusts, or related parties to support estate planning and wealth transfer objectives.
Important Planning Considerations
Depending on how the split dollar arrangement is structured, it may be governed under the Economic Benefit Regime or Loan Regime. These rules can affect taxation, reporting requirements, and overall planning considerations.
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 significant net worth who are seeking efficient ways to fund life insurance for estate liquidity, wealth transfer, or legacy planning purposes.
Business Owners
Owners of closely held businesses look to address succession planning, key employee retention, or long-term business continuity objectives.
ILIT Planning
Families exploring alternative methods of funding life insurance owned by an ILIT while preserving liquidity and supporting long-term estate planning.
Executive Business Planning
Employers seeking to provide supplemental benefits to key employees through customized life insurance arrangement.
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 significant net worth who are seeking efficient ways to fund life insurance for estate liquidity, wealth transfer, or legacy planning purposes.
Business Owners
Families with significant net worth who are seeking efficient ways to fund life insurance for estate liquidity, wealth transfer, or legacy planning purposes.
ILIT Planning
Families exploring alternative methods of funding life insurance owned by an ILIT while preserving liquidity and supporting long-term estate planning.
Executive Business Planning
Employers seeking to provide supplemental benefits to key employees through customized life insurance arrangement.
Key Considerations
Important Factors to Evaluate Before Implementing a Split Dollar Arrangement
Because split dollar arrangements involve multiple parties, legal agreements, and tax considerations, careful planning is essential.
The appropriate structure depends on the parties involved, ownership objectives, funding strategy, and long-term planning goals.
Ownership & Control
A split dollar arrangement should clearly define policy ownership, premium responsibilities, and each party's rights under the agreement.
Tax Considerations
The tax treatment of a split dollar arrangement can vary depending on how it is structured and funded. Professional tax and legal guidance is typically necessary.
Exit Strategy
It is important to consider how the arrangement may be modified, terminated, or unwound in the future and how policy values will be allocated.
Ongoing Administration
Split dollar arrangements often require documentation, monitoring, and periodic reviews to help ensure the arrangement continues to support its intended objective.
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
Life insurance funded through a split dollar arrangement may help create liquidity needed to address estate settlement costs and wealth transfer objectives.
Wealth Transfer Planning
Split dollar may be used to support Split dollar may support the transfer of wealth to future generations while balancing gifting, liquidity, and long-term planning considerations.
Business Succession Planning
Business owners may use split dollar arrangements as part of a broader succession, continuity, or ownership transition planning strategy.
Executive Benefit Planning
Employers may utilize split dollar arrangements to attract, retain, and reward key employees through customized benefit programs and long-term incentive strategies.
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 of a life insurance policy. The arrangement is governed by a written agreement that defines ownership rights, premium funding responsibilities, and how policy values and death benefits will be allocated.
What type of split dollar arrangements are available?
Split dollar arrangements can be structured in several ways depending on the objectives of the parties involved. Common approaches include endorsement split dollar, collateral assignment split dollar, and private split dollar arrangements. The appropriate structure depends on ownership, funding, tax considerations, and long-term planning goals.
Who typically uses split dollar life insurance?
Split dollar life insurance is often considered by affluent families, business owners, employers seeking executive benefit solutions, and families utilizing irrevocable life insurance trusts (ILITs). It is commonly used when parties are looking for a flexible approach to funding life insurance while supporting broader planning objectives.
Economic Benefit vs. Loan Regime: What's the Difference?
Split dollar arrangements are generally taxed under either the Economic Benefit Regime or the Loan Regime depending on how the arrangement is structured. These rules determine how benefits are valued, reported, and taxed. Because the applicable rules can significantly affect the outcome of an arrangement, professional tax and legal guidance is typically recommended.
Can split dollar life insurance be used with an ILIT?
Yes. In certain situations, split dollar arrangements may be used in conjunction with an ILIT to help fund life insurance while addressing gifting, liquidity, and wealth transfer objectives. The appropriateness of this approach depends on the overall estate plan, trust design, 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, and exit planning. While it can be a powerful tool in the right circumstances, it is not appropriate for every family, business, or planning objective.
Evaluate Whether Split Dollar Life Insurance May Support Your Planning Goals
Split dollar life insurance can be a flexible tool for estate planning, wealth transfer, business succession, and executive benefit strategies.
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