Unlocking Wealth Preservation: Split-Dollar Life Insurance and Irrevocable Life Insurance Trusts
By Dan Pauley, Partner, Smith Pauley LLP
Wealth preservation and estate planning often require innovative strategies that leverage the benefits of life insurance. One such powerful combination is the utilization of split-dollar life insurance within the framework of an Irrevocable Life Insurance Trust (ILIT). This strategic approach can provide individuals with a comprehensive solution for both financial security during their lifetime and efficient wealth transfer to beneficiaries.
Understanding Split-Dollar Life Insurance:
Split-dollar life insurance is a unique arrangement where the costs and benefits of a life insurance policy are shared between two parties, typically an individual and an employer, a family member, or a trust. This collaboration allows for the customization of the policy to meet specific needs, making it an attractive tool for high-net-worth individuals seeking both insurance protection and wealth transfer capabilities.
Key Features of Split-Dollar Life Insurance:
Cost Sharing: In a split-dollar arrangement, the parties involved agree on how to share the premiums, death benefit, and cash value of a life insurance policy. This can be structured in various ways, allowing for flexibility based on the specific goals of the individuals involved.
Cash Value Accumulation: The policy's cash value growth is an integral component of split-dollar arrangements. Depending on the structure, both parties may have access to the cash value, contributing to the overall financial flexibility of the strategy.
Tax Efficiency: Split-dollar arrangements can be designed to provide tax advantages. For example, the premiums paid by one party may be treated as a loan, and the death benefit may be distributed tax-free, offering potential tax benefits during the policyholder's lifetime and for beneficiaries.
Integrating Split-Dollar with Irrevocable Life Insurance Trusts:
Ownership and Control: Establishing an ILIT as the owner and beneficiary of the split-dollar life insurance policy can offer additional benefits. The ILIT provides a level of separation, removing the policy's value from the insured's estate for estate tax purposes. The trust also ensures that the death benefit is distributed according to the grantor's wishes.
Estate Tax Mitigation: Assets transferred to an ILIT are typically excluded from the grantor's taxable estate, providing an effective strategy for mitigating estate taxes. The split-dollar arrangement, when coupled with an ILIT, enhances the overall estate planning impact by combining the benefits of cost-sharing with the tax advantages of an irrevocable trust.
Wealth Transfer Efficiency: The ILIT can facilitate the seamless transfer of wealth to beneficiaries, avoiding the delays and complications associated with probate. Additionally, the trust structure provides a level of asset protection, ensuring that the policy proceeds are used according to the grantor's intentions.
Split-dollar life insurance, when integrated into an Irrevocable Life Insurance Trust, becomes a potent instrument for wealth preservation and transfer. This sophisticated strategy combines the flexibility of cost-sharing with the tax advantages and control offered by an ILIT. As with any complex financial strategy, it is imperative to work closely with experienced financial and legal professionals to tailor the approach to individual circumstances and goals. By leveraging the synergy between split-dollar life insurance and irrevocable trusts, individuals can build a robust framework for securing their financial legacy and ensuring the well-being of their heirs.
Dan Pauley is a Partner at Smith Pauley. As a corporate law and estate planning attorney, he uses the practical knowledge gained from his 100+ year-strong Pauley family office, commercial development, lumber yard, ranching and farming business to support the specific legal needs of his clients across the country. He counsels businesses and their owners on issues related to business formation, corporate and real estate transactions, succession planning, mergers and acquisitions, and estate planning.
He has extensive experience advising business clients in a variety of corporate and agricultural industries. From the start of any matter, he partners with his clients to deliver strategic solutions to meet their unique needs. He provides proactive, ongoing advice throughout the relationship, offering ideas to save time, costs and avoid business risks.
Skilled in advising clients through the various stages of the estate planning and probate process, he works with his clients to ensure their family’s futures are secured. His complex estate planning experience includes successfully litigating multimillion-dollar contested estates and trusts for his clients.