H—Split-Dollar Funding Life Insurance Trust

Split-dollar offers a means of using employer-provided dollars to pay premiums for life insurance used for a variety of purposes, to include family income needs, estate taxes, and other estate settlement costs. When combined with an irrevocable life insurance trust, it is possible to take advantage of the gift tax laws while at the same time assuring that the proceeds will be received free of estate taxes.

These plans will likely be structured as: (1) an “equity collateral assignment plan” using a trust-owned policy with employer-paid premiums treated as loans to the employee under theloan regime(cash values owned by the trust but assigned to the employer as security for the loans); or (2) a “nonequity collateral assignment” plan using a trust-owned policy with the employee taxed under theeconomic benefit regime(employer entitled to all cash values). This last design offers the most flexibility and can be implemented as follows:

DURING LIFETIME,the employee establishes a trust and the trustee applies for, or obtains, insurance on the employee’s life. Thereafter, at the employee’s request, the employer and trustee enter into a split-dollar agreement providing for the allocation of premiums, cash values and death benefits on the trust-owned insurance policy. Under this agreement the employer pays all premiums and is entitled to all cash values (by virtue of a limited collateral assignment from the trust).