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. Parent-owned life insurance may:
Provide life insurance protection for the son or daughter
Substantial disability protection for the son or daughter
Offer a cheaper way of financing Dad's (or Mom's) retirement
Give peace of mind for Dad (or Mom), knowing that he has ensured that his child has provided for the the next generation
Give peace of mind that, should the insured child suffer a long term disability, he or she will be financially benefited - reducing the need to help support that child
Over time, provide the potential for 7%, 8%, or even 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 life
Allow access to the money at all times 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 the younger generation, while also providing tax-favored capital growth for the older generation. The member of the younger generation (child, grandchild, son-in-law, nephew, niece, etc.) must qualify for the amount of life insurance by demonstrating an insurance need. He then grants a collateral assignment of the policy to the older generation party, who pays the premiums.
The older person retains rights to the cash value portion of the policy. He is not limited to the contribution limits of a qualified plan, and he may make loans against the cash value, and should the insured die, he 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 the premium payer, he may choose to take distributions, such as for his own retirement, via policy loans. Upon his death, his interest in the cash / loan value passes to his surviving spouse. Upon the subsequent death of the spouse, interest in the cash value passes to the insured.
The insured receives a gift of roughly the amount of the cash value when she becomes heir to the full policy. Prior to that time, she is presumed each year to have been gifted the value of the insurance protection that he is able to designate to her own beneficiary. The value of each gift is approximately the value of one-year term insurance for her attained age, and would easily be within the father's annual exclusion gift tax exemption, unless the policy were very large.
Consider the ramifications of this arrangement. Dad gets to use the policy - especially if it is indexed universal life insurance (IUL) with participating loans - as a vehicle to fund his own retirement, and that of his spouse.
Even if Dad 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 know 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.