The Corporate Sponsorship of Legacy: Split-Dollar Life Insurance
The Corporate Sponsorship of Legacy: Split-Dollar Life Insurance
You need a $50M death benefit to pay estate taxes, but the $1M annual premium destroys your gift tax exemption. How to make your company pay the premiums legally, while keeping the payout tax-free.
Executive Summary
- The Premium Problem: To cover a $100M estate tax bill, you buy a massive life insurance policy inside an ILIT (Irrevocable Life Insurance Trust). The premium is $2M/year.
👉 The Trap: To pay the premium, you must gift $2M cash to the Trust. This uses up your Lifetime Gift Exemption rapidly. Once the exemption is gone, you pay 40% gift tax just to pay the insurance bill. - The Solution (Split-Dollar Loan Regime): Instead of *you* gifting the money, your *Company* (or Family Office) lends the premium to the Trust.
👉 No Gift Tax: Because it’s a loan, not a gift, it uses **$0 Exemption**.
👉 The Split: When you die, the Company gets its loan principal back (The Split). The Trust keeps the massive Death Benefit (The Surplus) tax-free. - The Leverage: You lock in the interest rate at the incredibly low **Long-Term AFR** (Applicable Federal Rate) for the life of the loan. If the policy grows at 6% and the loan interest is 3%, the spread is pure wealth transfer.
The “Interest Accrual” Strategy
Cash Flow Management: The Trust usually doesn’t have cash to pay the annual interest to the Company.
👉 The Fix: You can structure the loan so that interest accrues (piles up) instead of being paid annually. The accrued interest is simply paid back from the Death Benefit at the end. This means zero cash out of pocket for the family during your lifetime.
Mechanic: The Flow of Funds
Simulation: Funding a $50M Policy (20-Year Horizon)
| Feature | Standard Key Man Insurance | Split-Dollar (Loan Regime) |
|---|---|---|
| Policy Owner | The Company | The Trust (ILIT) |
| Death Benefit Tax | Taxable (AMT / Corp Tax) | Tax-Free (Estate & Income) |
| Cost to Owner | Lost liquidity | Secured Loan (Recoverable) |
“Rich people don’t pay for life insurance; their assets do. Split-Dollar is the ultimate leverage: using your business’s balance sheet to secure your family’s future, while the IRS treats it as a simple commercial loan.”