Y—Private Split Dollar

Whereas a traditional split-dollar plan involves an employer and an employee, a private split-dollar plan is an agreement between individuals, or between an individual and a trust. A private split-dollar plan enables an insured tobothhave the policy cash values available for emergency and retirement purposes and exclude life insurance proceeds from his or her estate. For example, assume that a married couple wishes to establish a private split-dollar plan.

DURING LIFETIME. The individual who will become the insured (the “grantor”) establishes an irrevocable life insurance trust with the grantor's spouse and children as trust beneficiaries. The trustee then applies for life insurance on the grantor and enters into a collateral assignment split-dollar agreement with the spouse that provides for the sharing of premiums and death benefits between the spouse and the trust. Under the agreement, the spouse owns all cash values (although the policy is trust owned) and retains the sole right to borrow against or withdraw policy cash valves.

The trust’s share of the premium is equal to the “economic benefit” of the death benefit payable to the trust. To fund the trust’s portion of the premium, the insured makes annual gifts to the trust. These will qualify as “present interest” gifts provided the trust beneficiaries have Crummey withdrawal powers.