Spit dollar life insurance is a highly effective estate planning technique for high net worth individuals. It is essentially a strategy in which an individual can utilize a series of separate annual loans in order to make premium payments for his or her life insurance policies. This arrangement is also common for employers who provide life insurance for highly compensated employees as a supplemental benefit.
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 $14,000 per year per beneficiary) to pay the full premium amount.
The strategy works as follows. Prior to the premium payment, an individual will enter into a loan agreement with the irrevocable trust for the stated applicable federal interest rate (AFR). This process will continue each year until the death of the insured.
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 to the irrevocable trust or other designated beneficiaries tax-free.
If you are an individual who would like to purchase additional life insurance or believe that split dollar planning would be beneficial, please do not hesitate to contact the Morris Law Group.