Split Dollar

Split dollar arrangements split premiums, cash values, and death benefits between parties, aiding estate liquidity, tax minimization, and executive retention for tax-exempt entities or individuals funding large policies. Historically, these plans allowed premium payers to pledge cash values as security, but IRS scrutiny targeted untaxed equity as abusive interest-free loans under old rules. Post-2003 Final Regulations, pre-existing plans follow economic benefit rules unless modified, with equity taxation on termination or conversion.

New arrangements fall under economic benefit or loan regimes: the former advances premiums annually, taxing the lower term-cost benefit as income or gift, ideal for lower initial costs at younger ages or survivorship policies using Table 2001 rates. The loan regime treats premiums as repayable loans with imputed interest under §7872, repaid via cash value or death proceeds, avoiding benefit taxation but accruing interest on cumulative amounts. Both ensure compliance, with economic benefit suiting tax efficiency and loans fitting repayment structures.

Properly structured, split dollar remains viable for corporate replacement funding or ILIT integration, though consulting advisors is key for gifting implications. It minimizes cash flow burdens while leveraging life insurance’s tax advantages, evolving from equity collateral assignments to regulated, transparent tools.