What Is Split-Dollar Life Insurance?

**Split-dollar life insurance** is a strategic financial tool that allows **two parties (typically an employer and employee)** to share the cost and benefits of a life insurance policy. The structure provides significant **tax and estate planning advantages**.

These arrangements are used to:

• Reduce **out-of-pocket premium costs**.
• Leverage life insurance for **business succession planning**.
• Provide **executive benefits** while maintaining control over policy ownership.
• Optimize **tax-efficient wealth transfers**.

Loan Regime vs. Economic Benefit Regime

Split-dollar life insurance structures fall under **two primary regimes**, each with distinct **tax implications**.

1. Loan Regime

Under the **loan regime**, the employer **loans premium payments** to the employee to fund a life insurance policy. The loan accrues interest, and the employee owns the policy.

Key Features:

• Interest **accrues on the loan** (typically at the **Applicable Federal Rate (AFR)**).
• The loan is repaid from the **policy’s cash value or death benefits**.
• Tax implications vary based on **loan structure and interest rates**.

Example:

• Annual premium loan: **$1,000,000 for 10 years**.
• AFR interest rate: **5%**.
• Annual interest accrued: **$50,000**.
• Loan repayment period: **25 years**.

2. Economic Benefit Regime

Under the **economic benefit regime**, the employer owns the policy and provides the employee with **death benefit protection**.

Key Features:

• Employees are **taxed on the economic benefit** of the coverage.
• Cost is determined using **IRS Table 2001 rates**.
• The employer retains **policy ownership**.

Example:

• Coverage: **$20,000,000**.
• Table 2001 rate for a **40-year-old**: **$1.65 per $1,000**.
• Annual taxable benefit: **$33,000**.

Switching Between Regimes for Tax Efficiency

One **unique advantage** of split-dollar life insurance is the ability to **switch between the loan and economic benefit regimes** to optimize tax outcomes.

When to Switch from Loan Regime to Economic Benefit Regime

• To **reduce taxable interest costs** when interest rates rise.
• To simplify **tax reporting** by avoiding imputed interest calculations.

When to Switch from Economic Benefit Regime to Loan Regime

• To **leverage policy cash value** for business or personal use.
• To reduce tax burdens when **economic benefit costs increase with age**.

Case Study: How a CEO Uses Split-Dollar Insurance for Tax Savings

Scenario:

A 40-year-old CEO **opts for a split-dollar arrangement** with a **10-year premium payment** of **$1M annually** and an AFR of **5%**.

Loan Regime (Years 1-10)

• Total loaned: **$10,000,000**.
• Interest accrued annually: **$500,000**.
• Policy ROI: **7%** (cash value grows to $14M after 10 years).

Switching to Economic Benefit Regime (Year 11+)

• Taxable benefit cost at **age 51**: **$54,200**.
• Increases annually based on **IRS Table 2001 rates**.

Tax Savings: The CEO **avoids $500,000+ in annual interest tax liabilities** by switching to the **economic benefit regime** after 10 years.

Key Risks & IRS Compliance Requirements

While **split-dollar life insurance** offers **significant tax advantages**, improper structuring can **trigger IRS audits and penalties**.

Common Risks:

• Failure to properly **document loan agreements**.
• Incorrectly reporting **economic benefits**.
• IRS reclassification of loans as **taxable compensation**.

How to Ensure IRS Compliance:

• Maintain **detailed documentation** of all agreements.
• Conduct **annual reviews** to ensure compliance with tax laws.
• Work with **tax professionals** to optimize structuring.

Optimize Your Tax Strategy with Guardian Tax Consultants

Structuring a **split-dollar life insurance plan** requires **expert tax planning** to **maximize benefits and ensure compliance**.

Our team helps with:

• Customized split-dollar **tax strategies**.
• Proper **loan structuring and documentation**.
• IRS compliance **risk mitigation**.

Take Action: Schedule a consultation today.