Update To Estate Planning Through Split Dollar Life Insurance
By: Michael S. Gross - July 31, 2018
Split Dollar life insurance has been discussed here previously. As a reminder, Split Dollar Agreements, which are a highly effective estate planning technique for high net worth individuals, can be used in a business setting or privately with family members. Basically, either a business or individual, as the case may be, will provide a series of separate annual loans (typically to an irrevocable life insurance trust) in order to make premium payments on life insurance.
Split dollar life insurance is especially useful for those individuals who would like to have their life insurance policies owned in an irrevocable trust, yet do not have the necessary annual exclusion amount available (currently $15,000 per year per beneficiary) to pay the full premium amount.
Upon the insured’s death, the lending party will be paid off from the amount of the death benefit. The remaining death benefit will pass the designated beneficiaries tax-free.
A variation on this is Intergenerational Split Dollar Life Insurance. This works as follows: A parent provides funds for the purchase of a life insurance contract (typically with a single lump sum premium payment) on the life of the child. The policy is held in an irrevocable life insurance trust. In return for the payment, the parent will have a receivable, payable upon the death of the insured.
Given that the receivable is illiquid and the life expectancy of the child is lengthy, the value of the receivable is deeply discounted.
This technique has been gaining in popularity, however, there have been some unfavorable recent rulings regarding it. There are a number of cases, making their way through the court system. One of the cases is the Estate of Cahill (TCM 2018-84). The estate requested a ruling that certain code sections that would cause the receivable to be valued at face value rather than the discount not apply. The court rejected this ruling request. The technical arguments are beyond the scope of this article, however, it creates uncertainty in this planning technique. It should be noted that these rulings are preliminary and there will be further litigation before a final decision is made on the subject.
If you have entered into one of these arrangement and would like to discuss it with us, or, if you believe that you may be subject to estate tax upon your death and are interested in learning more about intergenerational or traditional Split Dollar arrangements, please do not hesitate to contact the Morris Law Group to discuss how they may be helpful to achieve such estate planning goals.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.