Split Dollar Irrevocable Life Insurance Trust

Using Split Dollar Funding in an Irrevocable Life Insurance Trust

DISCLAIMER: The purpose of this information is to provide general information which is subject to change and is specific to state law. ReliaQuote is not providing legal advice. If you have a specific legal issue or accounting issue, you should consult with a lawyer who is licensed to practice law in your jurisdiction or a certified public accountant familiar with tax regulations in your jurisdiction.

For individuals or couples who have ownership in a corporation, using split dollar funding enables a corporation to pay for the premiums of the life insurance policy in an irrevocable life insurance trust (premium payments by the corporation are non-deductible). Under the contributory plan, which is the most common form of split dollar funding, the corporation pays the premium and the t pays the corporation for a portion of the premium. The trust's portion is usually the lower of the P.S. 38 rate (government established rate on the lives of two people) or an insurance companies joint life one-year term life rate. 

A split dollar agreement is established by the creation of an agreement between the grantors employer and the trust. There are two different forms of split dollar agreements used depending on the grantors and spouses percentage of ownership in the corporation. A collateral assignment split dollar agreement is used if ownership in the corporation is less than 51% by the grantor and spouse. If ownership in the corporation by the grantor and spouse is 51% or more then a majority shareholder split dollar agreement is used. Upon the death of the second spouse (assuming a joint life insurance policy is used) the trust receives the death benefit of which a portion is used to pay back the corporation for the premiums it paid and the remainder can be used to pay for estate taxes and expenses.