Private Split Dollar - Family Split Dollar - Generational Split Dollar
Private Split Dollar (Family Split Dollar) - especially when used with Indexed Universal Life Insurance (IUL) - can be a "home run" for both parties. Family Split Dollar Life Insurance may provide important benefits to both the older generation and the younger generation.
Assuming the parent is "G1", the child is "G2", and the grandchildren are "G3", Family Split Dollar can:
· Provide life insurance protection for G2.
· Supply income to G2 if disabled, thanks to the optional Waiver of Specified Premium Rider.
· Supplement the retirement income of G1.
· Give peace of mind to G1, knowing that G2 has provided for G3.
· Give peace of mind to G1, that should G2 suffer a long-term disability, G2 will be financially benefited - reducing the possible need for G1 to help support G2.
Over time, provide the potential for 6%-10% average gains with never an investment loss (even greater potential returns, if using low-risk leverage).
Let the money grow income tax free for lifetimes of both G1 and G2.
Always allow access to the money through loans, which may charge less interest than the growth rate of the cash.
Private Split Dollar life insurance (Family Split Dollar) gives protection for G2, while also providing tax-favored capital growth for G1. The member of G2 or G3 (child, grandchild, son-in-law, nephew, niece, etc.) must qualify for the amount of life insurance by demonstrating an insurance need. G2 or G3 then grants a collateral assignment of the policy to G1, who pays the premiums.
G1 retains rights to the cash value portion of the policy. G1 is not limited to the contribution limits of a qualified plan, and may make loans against the cash value, and should the insured die, G1 would be the beneficiary for an amount equal to the cash value. The remainder of any death proceeds would go to designated beneficiary(ies) of the insured. During the lifetime of G1, the premium payer, G1 may choose to take distributions, such as for G1 retirement, via policy loans. Upon the death of G1, the interest of G1 in the cash / loan value passes to any surviving spouse of G1. Upon the subsequent death of the spouse, interest in the cash value passes to G2.
Along the way, G2 is deemed to have been receiving a gift of the value of the insurance protection that G2 is able to designate to G2's own beneficiary. The amount of each gift is approximately the value of one-year term insurance for G2's attained age, and would easily be within G1's annual exclusion gift tax exemption, unless the policy were very large. Upon the last death of G1 or the spouse of G1, ownership of the policy and its net cash value are passed to G2.
Consider the ramifications of this arrangement. G1 and the spouse of G1 might supplement their own retirement while still leaving a valuable asset to G2, who subsequently may retire using the same policy!
Even if G1 is still insurable, cost of insurance charges will likely be lower using Family Split Dollar, since the insured in this case is younger.
Loan-based split dollar (loan regime split dollar), along with endorsement split dollar are seen in employer / employee settings. Private Split Dollar, also known as Family Split Dollar or Generational Split Dollar, may take many forms. Historically, Private Split Dollar has been used as an estate planning tool. The version in this article describes a different, but no less compelling, use.