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Private Split Dollar

RetirementWhen planning has been completed & the decision has been made to fund the remaining estate tax liability via the use of insurance, one key question remains. How?

All too often, clients are faced with the dilemma of a premium that is higher than which they can make annual gifts ($15,000/beneficiary/spouse). In prior times, the planners involved would then simply downshift and purchase as much coverage as the gifting would allow. But while knowing they put their clients in a vulnerable position as this often left a significant gap in taxes due vs. insurance proceeds.

But via a planning technique called Private Split Dollar, this dilemma can be solved. Taking a version of traditional Corporate Split Dollar, the client can purchase the full amount of coverage needed without the usual gifting limitations.

In essence, this concept allows for an agreement between the client and the Irrevocable Life Insurance Trust (ILIT or IDIT if made “defective” for income tax purposes). The IDIT pays the “economic benefit cost”, or term premium equivalent, of the coverage using the very low government 2001 Table rates similar to term insurance rates. The client then pays the balance of the premium. Now the only gift made each year is the gift to the trust for this “term premium” equivalent. This is dramatically lower than the gift for the full premium.

Generally, Mercury recommends an exit strategy with this technique so that the client “rolls out” of the Split Dollar arrangement at some point. This can be done a number of ways including the use of a GRAT.

The end result is a client who is able to purchase the desired amount of coverage for estate tax purposes without gifting limitations. By doing so, they have addressed their tax liability using heavily discounted dollars.