Gift Tax Alternatives for Acquiring Life Insurance…Private Split Dollar

You’ve been financially successful and are at a point in life where it is important to begin preserving your wealth for your family. Life insurance, as an estate liquidity tool, can play an important role in maintaining your wealth. Although life insurance owned by an irrevocable trust is not subject to estate tax, the gift of the premiums to the trust may be subject to gift tax. A Private Split Dollar arrangement can help minimize or even eliminate gift taxes so you can secure the liquidity you need.

What is Private Split Dollar?

A Private Split Dollar arrangement “splits” the costs and benefits of a life insurance contract between you and an irrevocable trust. The irrevocable trust owns a life insurance on you (individual policy) or you and your spouse (survivorship policy). Under this type of arrangement you pay the insurance premiums since the irrevocable trust typically does not have the funds to do so. The premium payments are fundamentally treated as a personal loan, except the cost of the loan is based on the economic benefit.

How does it Work?

You enter into a Private Split Dollar Agreement with your irrevocable trust. The trustee of the irrevocable trust will then purchase a life insurance policy. As security for the premium payments you make, you will be collaterally assigned the greater of the policy’s cash value or premiums paid. At death your estate will receive repayment from the life insurance proceeds.

The value of the gift you make to the irrevocable trust is based on the economic value of the death benefit, which is significantly less than the annual premium. The economic value refers to the economic benefit (or term cost) of the death benefit. The economic benefit increases annually based on your age and is determined by a government table or insurance company rate table. When a survivorship policy is used the economic benefit can be extremely low since the value is based on two lives. Finally, the gift of the economic benefit may be covered by your available annual gift tax exclusions, allowing you to avoid or reduce gift taxes significantly. In 2010, this amount is $13,000.


  1. Estate Liquidity. You can secure life insurance protection while minimizing or eliminating gift taxes.
  2. Reduction in Gift Tax Value. The economic benefit rates for survivorship policies are extremely low, reducing the plan’s gift tax cost.
  3. Cost-effective Alternative to Premium Financing. The gift tax cost of the plan can be significantly lower than the loan interest cost in a premium loan arrangement.
  4. Leverage Gifts. You can leverage your annual gift tax exclusion gifts significantly                with life insurance.

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