Life is great!  You are financially successful and have a family with children – even grandchildren.  Because your family is so important to you, you plan on leaving a legacy to the next generation in hopes that your family’s good fortune continues.  Now the question is:  What is the most efficient way to transfer your wealth to the next generation?  

Life insurance in an irrevocable life insurance trust (ILIT) may be the answer.  Often the cornerstone of a solid wealth transfer strategy, ILIT-owned life insurance potentially offers immediate, income-tax free money upon the death of the insured.  A private split dollar arrangement is one tool you can use to efficiently fund the life insurance premiums in a wealth transfer strategy.  

Howard Insurance has helped families protect their legacies via structuring private split dollar arrangements for over twenty-five years.

How it Works

Generation 1 (G1), the grantor, creates an ILIT for the benefit of future generations and the ILIT applies for life insurance on the grantor.  The ILIT could also apply for a second-to-die policy on the lives of the grantor and his or her spouse.  The trustee of the ILIT enters into a split dollar agreement with the grantor whereby the grantor annually advances money to the ILIT to be used to pay the premiums on the policy.  As security for the premium advances, a collateral assignment is placed on the policy, requiring payment of the greater of the policy’s cash value or premiums paid at death or rollout.

The advancement of premiums can be treated as either a loan or an economic benefit.

Economic Benefit Regime

Under an ‘economic benefit regime’, each year the grantor is deemed to have made a gift to the ILIT equal to the “economic benefit” cost associated with the death benefit being provided to the ILIT.  Alternatively, the ILIT can pay the economic benefit cost to the grantor to avoid a gift if the ILIT has cash available to do so.   The economic benefit associated with the death benefit is the cost of term insurance and determined by using premium rates published by the IRS in Table 2001 or, if lower, the qualifying one-year term rates published by the issuing insurer.  

Because the economic benefit cost is the annual renewable term cost on the life of the insured, that cost increases incrementally each year as the insured gets older, unlike a fixed interest rate.

Loan Regime

Under a loan regime, an appropriate interest rate, usually the AFR’s long-term rate, is charged to the ILIT for the advanced premiums.  As with economic benefit treatment where the grantor typically gifts to the ILIT the amount needed to pay the ILIT’s portion of the premium, under a loan regime, the grantor gifts the amount to the ILIT required to pay interest on the premium loan balance.

The lower the AFR long-term rate, the more attractive it is to utilize the loan regime.  Given existing relatively low rates, those considering private split dollar should evaluate the likely total loan cost and compare it to the illustrated economic benefit.  It may be that a loan regime is more attractive; though, as rates increase, this may not be the case.

Howard Insurance can help determine if applying an economic benefit or a loan regime is the best way to treat premiums advanced under a private split dollar plan.


Similar to other funding methods, there are various ways to repay the greater of the policy’s cash value or the premiums paid.  At the death of the insured grantor, this amount can be repaid from a portion of the policy’s death benefit.  The trustee can also use the death proceeds to lend to the estate or purchase assets out of the estate, providing even greater liquidity if needed.  

Conversely, during the insured’s life, the split dollar arrangement can be repaid through a number of wealth transfer strategies, including GRATs, CLTs, sales to defective trusts, or gifts.

Benefits of Private Split Dollar

There are a number of benefits to entering into a private split dollar arrangement:

Intergenerational Split Dollar

A form of private split dollar, intergenerational split dollar uses available funding by a senior generation (G1) to pay for life insurance on the next generation (G2) for the benefit of future generations (G3).  In essence, it is an economic benefit regime split dollar arrangement with the family serving as the bank, thereby funding premiums to the life insurance policy owner, typically an ILIT.  G1 typically pays the portion of the premium equal to the economic benefit and, at the death of the G2 insured, the death benefit is paid to the ILIT for the benefit of G3.

It is likely that the insured—generally a child or grandchild of G1—will live for many more years after the parties have entered into such an intergenerational split dollar agreement.  Therefore, it is unlikely that G1’s estate will be paid back any time soon and the value of the receivable repayment is subject to a substantial discount when calculating the taxable estate of the G1.  This ability to include the discounted value of the premium loans in G1’s estate rather than the full amount makes intergenerational split dollar attractive for efficient wealth transfer. 

Recent decisions handed down by the United States Tax Court have reinforced not only the intergenerational split dollar structure but also affirmed that the 2002 and 2003 Final Split Dollar Regulations continue to control the facts in similarly structured split dollar arrangements.

If passing wealth to several generations is your goal, Howard Insurance can evaluate if an intergenerational split dollar arrangement is optimal.

Protect Your Legacy

Private split dollar is a powerful planning technique that allows a client to pay annual premiums on a policy owned in an ILIT without having to make large gifts that would exceed the client’s lifetime exemption and incur gift taxes.  For over 75 years, Howard Insurance has helped each of our select clients secure their assets, their ambitions, their businesses and, ultimately, their legacies.  Leaders in private insurance advisory and risk management, we pair deep expertise with sincere attention to our clients’ needs to create unique solutions that benefit them best.


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