4022 / What is a split dollar plan?

Split dollar insurance is an arrangement that often exists between an employer and an employee under which policy benefits are split and the premiums may be split. Split dollar plans also can be set up between corporations and shareholders (“shareholder split dollar”) or between parents and their children (“private split dollar”).

Planning Point: In 2021, the Tax Court ruled in favor of taxpayers who used a private split-dollar strategy in estate planning. In Morrissette v. Commisioner, T.C. Memo 2021-60 (May 13, 2021), a parent purchased life insurance on her sons’ lives – the policies were technically purchased through revocable “dynasty” trusts —for $29.9 million (premium costs). When she died, her reimbursement rights under these “split-dollar” arrangements were valued at only $7.5 million, because the policies would not pay out until the sons died at some future date. Essentially, the strategy is valuable because the difference between the two values is a tax-free gift. The IRS argued that a fair market valuation approach must be used in split-dollar cases, which would assign the much higher premium cost to the value of the policies using the logic typically applied to buy-sell arrangements in family businesses. The Tax Court instead found that the economic benefit theory of split-dollar could be applied, a result that favored the estate.

A similar case, Cahill v. Commissioner, T.C. Memo. 2018-84 (June 18, 2018), was settled out of court in 2018.

For years, the premium was often split, with the employer paying the cost of annual term coverage, and the employee paying the balance. Under this arrangement, the employer received from the proceeds an amount equal to the cash value of the policy or at least its premium payments, and the employee’s beneficiary received the balance of the proceeds.

From this basic concept, hybrid plans evolved. For example, there are “employer pay all” plans under which an employer pays the entire premium and “level contribution” plans under which an employee pays a level amount each year. There also are reverse split dollar plans ( Q 4030) and charitable split dollar plans ( Q 121).