Thursday, February 22, 2018

Split Dollar Life Insurance and the New Tax Plan

Split dollar life insurance is an extremely effective estate planning technique that this blog has discussed in the past. 

As a brief recap, split dollar life insurance is 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.

It 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 ($15,000 per year per beneficiary) to pay the full premium amount. Thus, the purpose of such arrangements are to reduce the tax consequences of paying large premiums on policies owned by irrevocable life insurance trusts.

A drawback of split dollar arrangements is that each year the loans continue to increase, thus becoming a burden as many years pass.

Under the new tax regime, the lifetime estate and gift tax exemption has been doubled to $11,200,000 (as indexed for inflation in 2018). This increased exemption may remove the need for many individuals to have such arrangements and provides the flexibility to terminate them.

By using a portion of the newly increased exemption, the insured could terminate the split dollar arrangement utilizing cash gifts to the trust which owns the policy in order to repay the amounts owed to the premium provider. 

Please do not hesitate to contact Morris Law Group if you have any questions about split dollar life insurance or the newly enacted tax plan.