The Funding Hack: Split-Dollar Life Insurance
The Funding Hack: Split-Dollar Life Insurance
How to use corporate cash to fund your personal estate tax bill without triggering massive gift taxes.
Executive Summary
- The Funding Gap: You need a $50M death benefit to pay estate taxes. The annual premium is $1M. If you gift $1M to your ILIT, you burn your lifetime exemption instantly. You need a better way.
- The Split-Dollar Solution: Your company loans the $1M premium to the ILIT every year. Since it is a loan (not a gift), there is no gift tax. The ILIT only pays the tiny “Economic Benefit” cost or interest (AFR).
- The Payback: Upon death, the company gets its loaned principal back (Tax-Free Return of Capital), and the family keeps the remaining death benefit (Tax-Free Wealth).
The Exit Strategy Risk
A Split-Dollar arrangement is a loan that accrues interest. If you live too long, the accrued interest can eat up the entire death benefit. You must have a planned “Roll-Out” strategy (e.g., using cash value to repay the loan) usually around year 15-20.
Mechanic: The Deal Structure
Company Pays
Premium Cash Flow
ILIT Owns
Policy Rights
Collateral
Assignment to Co.
Death Event
Split Proceeds
Simulation: $10M Policy Funding (Gift vs. Split-Dollar)
Gift Tax Exemption Usage (10 Years)
| Feature | Bonus Plan (Executive Comp) | Split-Dollar (Loan Regime) |
|---|---|---|
| Tax Deduction | Company deducts as wage | No Deduction (It’s a Loan) |
| Employee Tax | Income Tax on Premium | No Income Tax (Loan) |
| Cost Recovery | Company money is gone | Company gets money back |
“Why use your own after-tax money to pay for insurance when your company can lend you the pre-tax money to do it? Split-Dollar is the ultimate arbitrage of corporate liquidity.”
Essential Resources
INTERNAL
BMT Playbooks