4031 / What is private split dollar and how is it taxed?

Private split dollar is yet another variation on the traditional split dollar arrangement ( Q 4022). The label of private comes from the fact that this type of split dollar arrangement does not include the participation of an employer. Rather, a private split dollar arrangement is typically between two family members or one family member and a trust. When two family members are involved the label “family split dollar” often is used. A common example of family split dollar involves a father assisting his son in setting up a policy insuring the son’s life.

The IRS has said that the same principles that govern the tax treatment of employer-employee split dollar plans ( Q 4023, Q 4027) also should govern arrangements that provide benefits in gift contexts, which presumably would include private split dollar plans.¹

The regulations regarding split dollar also apply to private split dollar arrangements
( Q 4023). For the estate tax consequences of private split dollar, see Q 325 (under “Non-Employer-Employee Relationship”). For gift tax implications, see Q 578.